Coalb ook Company has the fulowing Intommation !ecle lor the past year. River Di

Question

Coalb ook Company has the fulowing Intommation !ecle lor the past year. River DiMsion Cost of gods sald and operaing egenss Net opersting Income Arsge Invsted assets 885 000 1253.000 The company's hurdlie rebe is 6.51 percent Required: 1. Calcul ne rtturn on Investment Ol) and esidusi Income lor each dlvislon for last yen: (Enter your ROl answers G percentage rounded o two deoli nal places ILa., 0.1234 should be entered as 12.34%. 2. Reca custe RO and residual income for each dl Slon for each independent stuenon th tfollows: Enter your Rolanowerc“ p roentag, rounded to two deolmal plaec, L. 0.1234 chould be entered aG 12.34%3 Opernting Income Incresses by 10 percent River b. Operating Income decresses by 8 percent. 0. The company Invests S252.000 In each dNislon, an mount that Qerenses 12,000 additional Income per dNislon. River d. Coolibrock changes s hudl rete to 4.51 percent

Explanation / Answer

Answer:Calculation of ROI and residual income

Formulae

# for calculating ROI = Net operating income / Average invested assets

# for residual income = Net operating income - ( Average invested assets * Hurdle rate)

Requirement # 1

Calculation of ROI and residual income for each division for last year: we will put values in the formulae stated above

#FOR RIVER DIVISION:

ROI = $317,000/$1,160,000 = 27.33%

RESIDUAL INCOME = $317,000 - ($1,160,000*6.51%)

=$317,000 - $75,516 = $241,484

FOR STREAM DIVISION

ROI = $522,000/$1,500,000 = 34.80%

Residual income = $522,000 - ($1,500,000*6.51%)

=$522,000 - $ 97,650 = $424,350

# Requirement 2 : Calculation of ROI and residual income when

Part a: When operating income increases by 10 %

First of all we will calculate the operating income as per the requirement in question for each division.

Operating income for river division will be = $317,000 + ($317,000*10%) = $348,700

Operating income for stream division will be = $522,000 + ($522,000*10%) = $574,200

# FOR RIVER DIVISION

ROI = $348,700/$1,160,000 = 30.06%

Residual income = $348,700 - ($1,160,000*6.51%) = $273,184

#FOR STREAM DIVISION

ROI = $574,200/$1,500,000 = 38.28%

Residual income = $574,200 - ($1,500,000*6.51%)

=$574,200 - $ 97,650 = $424,350 = $476,550

Part b: When operating income decreases by 8 %

calculate the operating income as per the requirement in question for each division.

Operating income for river division will be = $317,000 - ($317,000*8%) = $291,640

Operating income for stream division will be = $522,000 - ($522,000*8%) = $480,240

# FOR RIVER DIVISION

ROI = $291,640/$1,160,000 = 25.14%

Residual income = $291,640 - ($1,160,000*6.51%) = $216,124

#FOR STREAM DIVISION

ROI = $480,240/$1,500,000 = 32.02%

Residual income = $480,240 - ($1,500,000*6.51%)

=$480,240 - $ 97,650 = $424,350 = $382,590

Part c: Investment of $252,000 is made in each division and additional income of $ 112,000 is generated in each division:

# FOR RIVER DIVISION

ROI = ($317,000+$112,000) / ($1,160,000+$252,000)

= $429,000/$1,412,000 = 30.38%

Residual income = ($317,000+$112,000) - (($1,160,000+$252,000)*6.51%)

=$429,000 - ($1,412,000*6.51%)

=$429,000 - $91,921 = $337,079

#FOR STREAM DIVISION

ROI = ($522,000+$112,000) / ($1,500,000+$252,000)

= $634,000/$1,752,000 = 36.19%

Residual income = ($522,000+$112,000) - (($1,500,000+$252,000)*6.51%)

=$634,000 - ($1,752,000*6.51%)

=$634,000 - $114,055 = $519,945

Part d : Hurdle rate is changed to 4.51%

FOR RIVER DIVISION:

ROI = $317,000/$1,160,000 = 27.33%

RESIDUAL INCOME = $317,000 - ($1,160,000*4.51%)

=$317,000 - $52,316 = $264,684

FOR STREAM DIVISION

ROI = $522,000/$1,500,000 = 34.80%

Residual income = $522,000 - ($1,500,000*4.51%)

=$522,000 - $ 67,650 = $454,350

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