2. Compute the residual income for each division. (Loss amounts should be indica

Question

2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.)

3. Rank the divisions according to the ROI and residual income of each.

4-b. Is this an acceptable project?

5. Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI.


6. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be entered with a minus sign. Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

No Yes Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows: Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets Division A Division B Division C $ 1,250,000 1,129,000 1,140,000 828,000 64,000 52,000 10,203,000 2,447,000 4,024,000 772,000 75,000 59,000 829,000 63,000 52,000 Wescott is considering an expansion project in the upcoming year that will cost $7 million and return $565,000 per year. The project would be implemented by only one of the three divisions. Required 1. Compute the RO or each d vision Do not round your intermediate calculations. Round your percentage ans er o 2 décima places, e .12 sho uld be entered as 30% ROI Division A Division B Division C

Explanation / Answer

Answer

1.ROI = Net Operating Income / Average Invested Assets

2.Residual Income = Net Operating Income – (Average Invested Assets x Hurdle Rate)

Division A =$344000 – (10203000 x .08) = ($472240)

Division B =$185000 – (2447000 x .08) = ($10760)

Division C =$196000 – (4024000 x .08) = ($125920)

3.Both methods result in the same ranking:

Division B is performing best in each Division, Division C is next and Division A is last.

4.

$565,000 / $7,000,000 = 8.07%

The project generates a 8.07% return which is above the company’s hurdle rate of 8%. Thus, Brooks would see this as an acceptable project.

(As per chegg policy i give you only four answer)

Division Net Operating Income Average Invested Assets Calculation ROI Division A 1250000-772000-75000-59000 =344000 10203000 (344000/10203000)*100 3.37% Division B 1129000-829000-63000-52000 =185000 2447000 (186000/2447000)*100 7.60% Division C 1140000-828000-64000-52000 =196000 4024000 (196000/4024000)*100 4.87%

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