Use the Following Information to Answer Question Waverly Company Has Set a Target Return on Investment (ROI)

question 40

Essay

Use the following information to answer Question. The Furniture Division of Waverly Company reports the following results for 2012: $$\begin{array} { l l } \text { Revenues } & \$ 400,000 \\\text { Operating expenses } & \$ 360,000 \\\text { Operating income } & \$ 40,000 \\\text { Operating assets } & \$ 500,000\end{array}$$
Waverly Company has set a target return on investment (ROI) of 12% for the Furniture Division.
Assume that the division believes its revenues and operating expenses will continue to be $400,000 and $360,000, respectively. To what level would the Furniture Division have to reduce its operating assets to achieve the target ROI?

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Definitions:

Real Option Valuation

A technique in finance that calculates the value of future investment decisions, including the choices and flexibility in business projects.

Real Options

The value of additional decision-making opportunities available to a business when investing, likened to financial options.

Cash Flow

The amount of cash and cash equivalents being transferred into and out of a business, indicating its liquidity position.

Net Present Value

Net present value (NPV) is the calculation used to find today’s value of a future stream of payments and earnings, accounting for the time value of money.