Hy’s is a nationwide hardware and furnishings chain. The manager of the Hy’s Store in Boise is evaluated using ROI. Hy’s headquarters requires an ROI of 8 percent of assets. For the coming year, the manager estimates revenues will be $4,680,000, cost of goods sold will be $2,934,000, and operating expenses for this level of sales will be $468,000. Investment in the store assets throughout the year is $3,375,000 before considering the following proposal.

A representative of Ace Appliances approached the manager about carrying Ace’s line of appliances. This line is expected to generate $1,350,000 in sales in the coming year at Hy’s Boise store with a merchandise cost of $1,026,000. Annual operating expenses for this additional merchandise line total $153,000. To carry the line of goods, an inventory investment of $990,000 throughout the year is required. Ace is willing to floor-plan the merchandise so that the Hy store will not have to invest in any inventory. The cost of floor planning would be $121,500 per year. Hy’s marginal cost of capital is 8 percent. Ignore taxes.

 
Required      
 
    a. What is Hy’s Boise store’s expected ROI for the coming year if it does not carry Ace’s appliances?
 
    b. What is the store’s expected ROI if the manager invests in Ace’s inventory and carries the appliance line?
 
    c. What would the store’s expected ROI be if the manager elected to take the floor plan option?

    d. Would the manager prefer (a), (b), or (c)? Why?
 
    e. Would your answers to any of the above change if EVA was used to evaluate performance? For purposes of this problem, assume no current liabilities.

Answer rating: 100% (QA)

Return on investment ROI is a ratio which expresses the ratio of profits to investment in the asset ... View the full answer