Exercise 11-12 Evaluating New Investments Using Return on Investment (ROI) and R
ID: 2512125 • Letter: E
Question
Exercise 11-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income (LO11-1, LO11-2] Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Sales Average operating assets Net operating income Minimum required rate of return Division A $ 12, 640,000 $ 3,160,000 $ 606, 720 10.00% Division B $ 35,800,000 $ 7,160,000 $ 608,600 10.50% Division C $ 20,640,000 $ 5,160,000 $ 577,920 11.20% Required: 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 (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 11% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?Explanation / Answer
1.
Margin = Net Operating Income / Sales
Turnover = Sales / Average Operating Assets
ROI = Margin x Turnover
2.
Residual Income = Net Operating Income - [ Average Operating Assets x Minimum Required Rate of Return ]
3. a.
3. b.
Margin Turnover ROI Division A 4.8% 4 19.2 % Division B 1.7 % 5 8.5 % Division C 2.8% 4 11.2%Related Questions
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