Reference no: EM131875726

Question - House Station, Inc., is a nationwide hardware and furnishings chain. The manager of the House Station Store in Portland is evaluated using ROI. House Station headquarters requires an ROI of 10 percent of assets. For the coming year, the manager estimates revenues will be $2,250,000, cost of goods sold will be $1,417,500, and operating expenses for this level of sales will be $225,000. Investment in the store assets throughout the year is $1,627,500 before considering the following proposal.

A representative of Sharp's Appliances approached the manager about carrying Sharp's line of appliances. This line is expected to generate $700,000 in sales in the coming year at the Portland House Station store with a merchandise cost of $532,000. Annual operating expenses for this additional merchandise line total $75,000. To carry the line of goods, an inventory investment of $485,000 throughout the year is required. Sharp's is willing to floor plan the merchandise so that the House Station store will not have to invest in any inventory. The cost of floor planning would be $60,750 per year. House Station's marginal cost of capital is 10 percent. Ignore taxes.

Requirement 1: What is the Portland House Station store's expected ROI for the coming year if it does not carry Sharp's appliances?

Requirement 2: What is the store's expected ROI if the manager invests in Sharp's inventory and carries the appliance line?

Requirement 3: What would the store's expected ROI be if the manager elected to take the floor plan option?

Requirement 4: Considering the three cases given above, which do you think the manager would prefer?

Requirement 5: (a) What is the Portland House Station store's expected EVA for the coming year if it does not carry Sharp's appliances?

(b) What is the store's expected EVA if the manager invests in Sharp's inventory and carries the appliance line?

(c) What would the store's expected EVA be if the manager elected to take the floor plan option?