The Jackson Division of Florida Motors had an operating income of $335,000 and n

Question

The Jackson Division of Florida Motors had an operating income of $335,000 and net assets of $1,340,000. Florida Motors has a target rate of return of 12 percent. The Jackson Division has an opportunity to increase operating income by $50,000 if a $200,000 investment in assets is made.

What will Jackson’s ROI and Residual Income be if the project is undertaken?

A.

ROI 26 percent, Residual Income $200,000

B.

ROI 12 percent, Residual Income $50,000

C.

ROI 27 percent, Residual Income $198,000

D.

ROI 25 percent, Residual Income $200,200

Clarinet Publishing is considering the purchase of a used printing press costing $40,000. The printing press would generate a net cash inflow of $10,000 a year for 10 years. At the end of 10 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation.

The project's accounting rate of return on the initial investment is:

A.

75 percent

B.

15 percent

C.

32 percent

D.

19 percent

A.

ROI 26 percent, Residual Income $200,000

B.

ROI 12 percent, Residual Income $50,000

C.

ROI 27 percent, Residual Income $198,000

D.

ROI 25 percent, Residual Income $200,200

Explanation / Answer

a) Roi = Operating income*100/Operating assets

           = (335000+50000)*100/(1340000+200000)

ROi = 25%

Resiudal income =385000 - (1540000*12%) = 200200

so answer is d) ROI 25 percent, Residual Income $200,200

2) Accounting rate of return = net income*100/initial investment

Net income = 10000-(40000/10) = 6000

Accounting rate of return = 6000*100/40000 = 15%

so answer is b) 15 percent

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