Wescott Company has three divisions: A, B, and C. The company has a hurdle rate

Question

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 Division A Division B Division C Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets $1,295,000 $1,072,000 $ 1,074,000 780,000 61,000 49,000 3,793,000 800,000 72,000 56,000 9,684,000 787,000 60,000 49,000 2,306,000 Wescott is considering an expansion project in the upcoming year that will cost $5.8 million and return $532,000 per year. The project would be implemented by only one of the three divisions Required 1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.)) ROI DivisionA Division EB Division 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.) Residual income Loss DivisionA DivisionEB DivisionC 3. Rank the divisions according to the ROl and residual income of each Rank DivisionA DivisionEB DivisionC

Explanation / Answer

Division A Division B Division C Sales 1295000.00 1072000.00 1074000.00 Cost of goods sold 800000.00 787000.00 780000.00 Misc. operating Exp. 72000.00 60000.00 61000.00 Interest & Taxes 56000.00 49000.00 49000.00 Total Cost (COGS+Operating Exp.+Int.& Tax Expenses) 928000.00 896000.00 890000.00 Net Operating Income (NOI)      {Sales-Total Cost} 367000.00 176000.00 184000.00 Average Invested Assets 9684000.00 2306000.00 3793000.00 Answer to 1 ROI ( NOI/ Avg. Invested Assets) 3.79% 7.63% 4.85% Minimum Required return (Averege Invested Assets*8%) 774720.00 184480.00 303440.00 Answer to 2 Residual Income                          (NOI-Minimum Req. Income) -407720.00 -8480.00 -119440.00 Answer to 3 Ranking Accoring to ROI 3 1 2 Ranking Accoring to Residual Income 3 1 2 Expansion project Total Cost 5800000 NOI 532000 The Project would be implemented by one of the three division. The division vise ROI shall be as under if implemented by the same division:- Details Division A Division B Division C NOI 532000.00 532000.00 532000.00 Average Invested Assets 9684000.00 2306000.00 3793000.00 Answer 4 to 6 Revised ROI ( NOI/ Avg. Invested Assets) 5.49% 23.07% 14.03% There is incerease in ROI in all three divisions. Hence, proposal should be accepted. Minimum Required return (Averege Invested Assets*8%) 774720.00 184480.00 303440.00 Revised Residual Income                          (NOI-Minimum Req. Income) -242720.00 347520.00 228560.00

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