Hubbard Division of the Market Company has an opportunity to invest in a new pro

Question

Hubbard Division of the Market Company has an opportunity to invest in a new project. The project will yield an incremental operating income of $37,250 on average invested assets of $470,000. Hubbard currently has operating income of $195,000 on average invested assets of $2,090.000. Market Company requires a 6% rate of return on new projects a. What is Hubbard's ROl before making an investment in the project? (Round your answer to 2 decimal places.) eturn on b. What is Hubbard's residual income before making an investment in the project? esidual Income c. What is Hubbard's ROIl after making the investment in the project? (Round your answer to 2 decimal places.) urn on d. what is Hubbard's residual income arter making the investment in the project? I Income

Explanation / Answer

A) ROI = Operating Income/Average Invested Assets

= 195000/2090000

= 9.33%

B) Residual Income = Operating income - (Target ROI * Average Invested Assets)

= 195000 - (0.06*2090000)

= 69600

C) ROI = Operating Income/Average Invested Assets

= (195000+37250)/(2090000+470000)

= 9.07%

D) Residual Income = Operating income - (Target ROI * Average Invested Assets)

= 195000+37250 - (0.06*(2090000+470000))

= 78650

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