3 The home appliances division of Benjamin Industries Ltd. now shows a profit of 5 per cent on sales of `12 lakh. An investment of `4,00,000 is needed to finance these sales. The management of the firm in considering the following two alternative plans for improving operations submitted by two employees, E1 and E2 : (a) E1 believes that the sales volume can be doubled by greater promotional effort. It would lower the profit rate to 4 per cent of sales and require an additional investment of `1,00,000. (b) E2 favours eliminating some unprofitable appliances and improving efficiency by adding `2,00,000 in capital equipment. This alternative would decrease sales volume by 10 per cent but improve the profit rate to 7 per cent of sales. You are required to determine: (a) The company’s current rate of return on investment in the division, (b) The anticipated rates of return under the alternatives suggested by E1 and E2 , and (c) Which plan, if any, will you recommend?
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