Question :
House Station, Inc., is a countrywide hardware and furnishings chain. The manager of the House Station Store in Portland is evaluated using ROI. House Station headquarters needs an ROI of 10 percent of assets. For the coming year, the manager estimates revenues can be $2,340,000, cost of goods sold will be $1,474,200, and operating expenses for this level of sales will be $234,000. Investment in the store assets throughout the year is $1,700,000 before considering the subsequent proposal.
A representative of Sharp's Appliances approached the manager about carrying Sharp's line of appliances. This line is expected to prepare $675,000 in sales in the coming year at the Portland House Station store with a merchandise cost of $513,000. Annual operating expenses for this additional merchandise line total $72,000. To carry the line of goods, an inventory investment of $505,000 throughout the year is needed. 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 could be $59,000 per year. House Station's marginal cost of capital is 10 percent. Ignore taxes.
Required:
(a) What is the Portland House Station store's expected ROI for the coming year if it does not carry Sharp's appliances?
(b) What is the store's expected ROI if the manager invests in Sharp's inventory and carries the appliance line?
(c) What could the store's expected ROI be if the manager elected to take the floor plan alternative?
(d) Would the manager prefer (a), (b), or (c) if evaluated using ROI?
The case where the manager elected to take the floor plan alternative.
The case where Portland House Station store does not carry Sharp's appliances.
The case where the manager invests in Sharp's inventory and carries the appliance line.
(e)
(1) What is the Portland House Station store's expected EVA for the coming year if it does not carry Sharp's appliances?
(2) What is the store's expected EVA if the manager invests in Sharp's inventory and carries the appliance line?
(3) What would the store's expected EVA be if the manager elected to take the floor plan option?
(4) Would the manager prefer (a), (b), or (c) if evaluated using EVA?