Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of

Question

Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of return of 12.5 percent. The operating assets and income for each division are as follows:

     

ATI headquarters has $120,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:

Required

a-1. Calculate the ROI for each division.

a-2. Which division manager is currently producing the highest ROI?

b. Based on ROI, which division manager would be most eager to accept the $120,000 of investment funds?

c. Based on ROI, which division manager would be least likely to accept the $120,000 of investment funds?

d. Which division offers the best investment opportunity for ATI?

g. Calculate the residual income:

(1) At the corporate (headquarters) level before the additional investment.

(2) At the division level before the additional investment.

(3) At the investment level.

(4) At the division level after the additional investment.

Req A1:

Req A2-D

ReqG1

ReqG2 to G4:

Divisions Operating Assets Operating Income Printer $ 540,000 $ 96,000 Copier 810,000 90,000 Fax 360,000 54,000 Total $ 1,710,000 $ 240,000

Explanation / Answer

Solution a1:

Solution a2:

Printer division manager  is currently producing the highest ROI.

Solution b:

Based on ROI, Copier division manager would be most eager to accept the $120,000 of investment funds, as expected ROI for additional investment is 13%, however Its current ROI is 11.11% only. Therefore accepting addtional investment will improve overall ROI of copier division.

Further ROI offered by other two division is higher than expected ROI from additional investment and accepting additional investment will decrease overall ROI of other two divisions.

Solution c:

Based on ROI, Fax division manager would be least likely to accept the $120,000 of investment funds as ROI offered by additional investment to Fax division is lower than ATI desired rate of return of 12.50%.

Solution d:

Printer division offers the best investment opportunity for ATI as ROI offered by this division is highest.

Note: I have answered first 4 parts of the question as per chegg policy. Kindly post separate question for answer of remaining parts.

Return on Investment Divisions Choose Numerator / Choose denomerator = Return on Investment Details Amount Details Amount Printer Operating Income $96,000.00 Operating Assets $540,000.00 17.78% Copier Operating Income $90,000.00 Operating Assets $810,000.00 11.11% Fax Operating Income $54,000.00 Operating Assets $360,000.00 15.00%

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