Requirements (a) Compute each division\'s return on investment and residual inco
ID: 2575213 • Letter: R
Question
Requirements (a) Compute each division's return on investment and residual income, assuming a 9% cost of capital. b) Suppose the net book value of each division's investments is half of the historical cost. Using net book value as the measure of investment, compute each division's return on investment and residual income, assuming a 9% cost of capital. (c) Comment on the division rankings in parts a and b. (d) If the division managers are rewarded on the basis of return on investment or residual income, will they find it attractive to invest in new, more costly equipment?Explanation / Answer
Dear Student Thank you for using Chegg Please find below the answer and please give thumbs up Statementshowing Computations Paticulars X Y Z a) Historical cost of investments 530,000.00 500,000.00 320,000.00 Division operating income 63,000.00 61,000.00 41,000.00 Return on investment = Income/Investment 11.89% 12.20% 12.81% Required Income = Investment *9% 47,700.00 45,000.00 28,800.00 Residual income = Income - Reqd income 15,300.00 16,000.00 12,200.00 Paticulars X Y Z b) Net book value = Historical cost/2 265,000.00 250,000.00 160,000.00 Division operating income 63,000.00 61,000.00 41,000.00 Return on investment = Income/Investment 23.77% 24.40% 25.63% Required Income = Investment *9% 23,850.00 22,500.00 14,400.00 Residual income = Income - Reqd income 39,150.00 38,500.00 26,600.00 c) Rankings as per part a 3.00 2.00 1.00 Rankings as per part b 3.00 2.00 1.00 d) Yes….since if the equipment is costly then Return on investment would be low as denominator(Investment) would be higher.Thus they would be less interested
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