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9 September, 09:57

The current controllable margin for Henry Division is $93,000. Its current operating assets are $300,000. The division is considering purchasing equipment for $90,000 that will increase annual controllable margin by an estimated $15,000. If the equipment is purchased, what will happen to the return on investment for Henry Division?

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  1. 9 September, 11:38
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    Return on investment is decreased by 3.30%

    Explanation:

    The computation of the return on investment is shown below:

    = (Controllable margin : operating assets) * 100

    = ($93,000 : $300,000) * 100

    = 31%

    Now the new controllable margin equals to

    = $93,000 + $15,000

    = $108,000

    And, the new operating assets would be

    = $300,000 + $90,000

    = $390,000

    So, the new return on investment equals to

    = ($108,000 : $390,000) * 100

    = 27.70%

    The return on investment is decreased by

    = 31% - 27.70%

    = 3.30%
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