Exercise 10.9 Residual Income and Investment Decisions Jarriot, Inc., presented
ID: 2417744 • Letter: E
Question
Exercise 10.9
Residual Income and Investment Decisions
Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division.
At the end of Year 2, the manager of the Houseware Division is concerned about the division’s performance. As a result, he is considering the opportunity to invest in two independent projects. The first is called the Espresso-Pro; it is an in-home espresso maker that can brew regular coffee as well as make espresso and latte drinks. While the market for espresso drinkers is small initially, he believes this market can grow, especially around gift-giving occasions. The second is the Mini-Prep appliance that can be used to do small chopping and dicing chores that do not require a full-sized food processor. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows:
Jarriot’s corporate headquarters has made available up to $500,000 of capital for this division. Any funds not invested by the division will be retained by headquarters and invested to earn the company’s minimum required rate of return, 9 percent.
Compute the change in profit (loss) from the divisional manager's investment decision.
$__?__
Explanation / Answer
Jarriot, Inc. Houseware Division If Invested in Expresso Pro Before Investment After Investment Change in Profit Balance Investment Oper. Inc 500000 527500 27500 22500 Net Assets 5000000 5250000 250000 250000 Return of Investments 10% 10% 11% 9% If Invested in Mini- prep Before Investment After Investment Change in Profit Balance Investment Oper. Inc 500000 519000 19000 27000 Net Assets 5000000 5200000 200000 300000 Return of Investments 10% 10% 10% 9% If Invested in Expresso Pro & min- prep Before Investment After Investment Change in Profit Balance Investment Oper. Inc 500000 546500 46500 4500 Net Assets 5000000 5450000 450000 50000 Return of Investments 10% 10% 10% 9%
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