Standard Media Has a Required Rate of Return of 5

question 108

Multiple Choice

Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent.The following information about its two divisions has been provided by management: $\begin{array}{lrr}&\text { Audio Division}&\text { Video Division }\\\text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \\\text { Sales } & \$ 10,000,000 & \$ 12,500,000 \\\text { Invested capital } & \$ 15,000,000 & \$ 17,500,000\end{array}$ An opportunity is available that yields an expected income of $45,900 on an investment of $450,000.If the divisions are evaluated based on return on investment, which division(s) will accept the opportunity?

• A)Both will accept.
• B)Neither will accept.
• C)Only the Video Division will accept.
• D)Only the Audio division will accept.

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Definitions:

Allowance Method

An accounting technique used to estimate and account for doubtful accounts receivable and adjust the amount of accounts receivable reported on the balance sheet.

Accounts Receivable

Money owed to a company by its customers for sales or services on credit, considered a current asset on the balance sheet.

Allowance for Doubtful Accounts

A contra-asset account used to estimate and offset the amount of receivables that may not be collected.

Uncollectible Accounts

Accounts receivable that a company does not expect to collect due to customer defaults.