3.00 points Coolbrook Company has the following information available for the pa
ID: 2457365 • Letter: 3
Question
3.00 points Coolbrook Company has the following information available for the past year Division Sales revenue Cost of goods sold and operating expenses Net operating income Average invested assets 1,200,000 $1,800,000 $ 300,000 500,000 1,200,000 1,800,000 900,000 1300,000 The company's hurdle rate is 6 percent Required: 1. Caloulate return on investment (RO) and residual income for each division for last year. (Do not your intermediate ca i lculations. Round "ROI" answers to 1 decimal place) River Division Stream Divis ROI 27.8 % Residual Income 2. Recalcudate ROl and residual income for each division for each independent situation that follows a. Operating income increases by 10 percent. (De not round your intermediate caloulations. Rd ROl" answers to 2 decimal places River Division Stream Division esc F2Explanation / Answer
1
Calculation of Return on investment and residual income:
River Division
Stream Division
Net Operating income (A)
$ 300,000
$ 500,000
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
25.0%
27.8%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 72,000
$ 108,000
Net Operating income (D)
$ 300,000
$ 500,000
Residual Income = D-C
$ 228,000
$ 392,000
2a.
Calculation of Return on investment and residual income if operating income increases by 10%
River Division
Stream Division
Net Operating income (A)
$ 330,000
$ 550,000
(300000*110%)
(500000*110%)
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
27.5%
30.6%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 72,000
$ 108,000
Net Operating income (D)
$ 330,000
$ 550,000
Residual Income = D-C
$ 258,000
$ 442,000
2b.
Calculation of Return on investment and residual income if operating income Decreases by 10%
River Division
Stream Division
Net Operating income (A)
$ 270,000
$ 450,000
(300000*90%)
(500000*90%)
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
22.5%
25.0%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 72,000
$ 108,000
Net Operating income (D)
$ 270,000
$ 450,000
Residual Income = D-C
$ 198,000
$ 342,000
2c.
Calculation of Return on investment and residual income after new investment
River Division
Stream Division
Net Operating income (A)
$ 400,000
$ 600,000
(300000+100000)
(500000+100000)
Average invested Assets (B)
$ 1,450,000
$ 2,050,000
(1200000+250000)
(1800000+250000)
Return on Investment = A/B
27.6%
29.3%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,450,000
$ 2,050,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 87,000
$ 123,000
Net Operating income (D)
$ 400,000
$ 600,000
Residual Income = D-C
$ 313,000
$ 477,000
2d.
Calculation of Return on investment and residual income If hurdle rate is 10%
River Division
Stream Division
Net Operating income (A)
$ 300,000
$ 500,000
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
25.0%
27.8%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
10%
10%
Required Net Operating income (C) = A*B
$ 120,000
$ 180,000
Net Operating income (D)
$ 300,000
$ 500,000
Residual Income = D-C
$ 180,000
$ 320,000
1
Calculation of Return on investment and residual income:
River Division
Stream Division
Net Operating income (A)
$ 300,000
$ 500,000
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
25.0%
27.8%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 72,000
$ 108,000
Net Operating income (D)
$ 300,000
$ 500,000
Residual Income = D-C
$ 228,000
$ 392,000
2a.
Calculation of Return on investment and residual income if operating income increases by 10%
River Division
Stream Division
Net Operating income (A)
$ 330,000
$ 550,000
(300000*110%)
(500000*110%)
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
27.5%
30.6%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 72,000
$ 108,000
Net Operating income (D)
$ 330,000
$ 550,000
Residual Income = D-C
$ 258,000
$ 442,000
2b.
Calculation of Return on investment and residual income if operating income Decreases by 10%
River Division
Stream Division
Net Operating income (A)
$ 270,000
$ 450,000
(300000*90%)
(500000*90%)
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
22.5%
25.0%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 72,000
$ 108,000
Net Operating income (D)
$ 270,000
$ 450,000
Residual Income = D-C
$ 198,000
$ 342,000
2c.
Calculation of Return on investment and residual income after new investment
River Division
Stream Division
Net Operating income (A)
$ 400,000
$ 600,000
(300000+100000)
(500000+100000)
Average invested Assets (B)
$ 1,450,000
$ 2,050,000
(1200000+250000)
(1800000+250000)
Return on Investment = A/B
27.6%
29.3%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,450,000
$ 2,050,000
Hurdle Rate (B)
6%
6%
Required Net Operating income (C) = A*B
$ 87,000
$ 123,000
Net Operating income (D)
$ 400,000
$ 600,000
Residual Income = D-C
$ 313,000
$ 477,000
2d.
Calculation of Return on investment and residual income If hurdle rate is 10%
River Division
Stream Division
Net Operating income (A)
$ 300,000
$ 500,000
Average invested Assets (B)
$ 1,200,000
$ 1,800,000
Return on Investment = A/B
25.0%
27.8%
Calculation of residual income:
River Division
Stream Division
Average invested Assets (A)
$ 1,200,000
$ 1,800,000
Hurdle Rate (B)
10%
10%
Required Net Operating income (C) = A*B
$ 120,000
$ 180,000
Net Operating income (D)
$ 300,000
$ 500,000
Residual Income = D-C
$ 180,000
$ 320,000
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