Using ROI, RI, and EVA to evaluate investment centers
Consider the following condensed financial statements of Money Freedom, Inc. The company's target rate of return is 10% and its WACC is 7%:
MONEY FREEDOM, INC
Comparative Balance Sheet
As of December 31, 2012 and 2011
Assets 2012 2011
Cash $77,000 $66,000
Accounts receivable 62,500 28,400
Supplies 500 600
Property, plant, and equipment, net 300,000 200,000
Patents, net 160,000 105,000
Total assets $600,000 $400,000
Liabilities and stockholder's equity
Accounts payable $32,000 $34,000
Short term notes payable $146,000 48,000
Long term notes payable 200,000 130,000
Common stock, no par 200,000 167,500
Retained earnings 22,000 20,500
Total liabilities and stock holder's equity $600,000 $400,000
MONEY FREEDOM INC.
Income Statement
For the Year Ended December 31, 2012
Sales revenue $5,000,000
COGS 2,900,000
Gross profit $2,100,000
Operating expenses 1,900,000
Operating income $200,000
Other: interest expense (20,000)
Income before income tax expense $180,000
Income tax expense (63,000)
Net income $117,000
Requirements
1. Calculate the company's profit margin. Interpret your results.
2. Calculate the company's asset turnover. Interpret your results.
3. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
4. Calculate the company's RI. Interpret your results.
5. Calculate the company's EVA. Interpret your results.