Accounting Evaluating New Investments Using ROI And Residual Income Homework Help
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Evaluating New Investments Using Return on Investment (ROI) and Residual Income
1.Selected sales and operating data for three divisions of three different companies are given below
|Division A||Division B||Division C|
|Sales. . . . . . . . . . . . . . . . . . . . . . . . . .||$6,000,000||$10,000,000||$8,000,000|
|Average operating assets . . . . . . . . . . .||$1,500,000||$5,000,000||$2,000,000|
|Net operating income . . . . . . . . . . . . . .||$300,000||$900,000||$180,000|
|Minimum required rate of return . . . . . .||15%||18%||12%|
1. Compute the return on investment (ROI) for each division, using the formula stated in terms of margin and turnover.
2. Compute the residual income for each division.
3. Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%.
a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why?
b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why?
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2.Rains Nickless Ltd. of Australia has two divisions that operate in Perth and Darwin. Selected data on the two divisions follow
|Sales . . . . . . . . . . . . . . . . . . . . . . .||$9,000,000||$20,000,000|
|Net operating income . . . . . . . . . .||$630,000||$1,800,000|
|Average operating assets . . . . . . .||$3,000,000||$10,000,000|
1. Compute the return on investment (ROI) for each division.
2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division.
3. Is the Darwin Division’s greater residual income an indication that it is better managed? Explain.
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