Chapter 11 Homework Assignment Help 7 Exercise 11-12 Evaluating New Investments

Question

Chapter 11 Homework Assignment Help 7 Exercise 11-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income LO11-1, LO11-2] 216 points Selected sales and operating data for three divisions of different structural engineering firms are given as follows: 28,960,000 $26,200,000 7,240,000 5,240,000 $ 463,360 655,000 12.50 $16,200,000 3,240,0007 7,00% Print operating income $ 761,400 Ninimum required 7.50 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 8% 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? Complete this question by entering your answers in the tabs below Req 1 Req 2 Req 3A Req 38 Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not Prev 7 of 7 Next 16

Explanation / Answer

Profit margin=Net operating Income/sales*100 Assets Turnover=Sales/Avg operating assets ans 1 Margin Turnover ROI Divisioon A 4.7 % 5.0 23.50 % 761400/16200000*100 16200000/3240000 Division B 1.6 % 4.0 6.40 % 463360/28960000*100 28960000/7240000 Division C 2.5 % 5.0 12.50 % 655000/26200000*100 26200000/5240000 ans 2 Division A Division B Division C Net operating Income N $761,400 $463,360 $655,000 Avg operating assets A 3240000 7240000 5240000 Min req rate M 7% 7.50% 12.50% Min required amt R=A*M 226800 543000 655000 Residual Income N-R $534,600 ($79,640) $0 ans 3 Division A Reject Division B Accept Division C Reject Only Division B will accept as its ROI of 6.4% is less than the investment opportunity. So it will go with this 8% ROI option ans 4 Division A Accept Division B Accept Division C Reject As min req rate for Divison A nd B is 7 and 7.5% respectively the investment opportunity with 8% will be accepted by those two. If any doubt please comment

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