Exercise 9-7 Contrasting Return on Investment (ROI) and Residual Income [LO1, LO

Question

Exercise 9-7 Contrasting Return on Investment (ROI) and Residual Income [LO1, LO2]

Rains Nickless Ltd. of Australia has two divisions that operate in Perth and Darwin. Selected data on the two divisions follow:

Division

Compute the return on investment (ROI) for each division. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 12%. Compute the residual income for each division.

Rains Nickless Ltd. of Australia has two divisions that operate in Perth and Darwin. Selected data on the two divisions follow:

Explanation / Answer

1. ROI for Perth = net operating income/average operatingassets = 529,830 / 2,900,000 = 18.27%
ROI for Darwin = net operating income/average operating assets = 1,527,120 / 10,100,000 = 15.12%

2. Residual income for Perth = net operating income - required rate of return*average operating assets = 529,830 -12%*2,900,000 = $ 181,830

Residual income for Darwin = net operating income - required rate of return*average operating assets = 1,527,120 -12%*10,100,000 = $ 315,120

Hope this helped ! Let me know in case of any queries.

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