ect cure https://newconnect.mheducation.com/flow/connect.html omework Assignment
ID: 2578709 • Letter: E
Question
ect cure https://newconnect.mheducation.com/flow/connect.html omework Assignment i Saved Help Save & Exit Submit Check my work Exercise 11-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO11-1, L011-2] Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division c Sales Average operating assets Net operating income Minimum required rate of return Division B $12,080,000 35,100,000 25,100,000 3,020,000 7,020,000 5,020, 000 $531,520526,500 627,500 9.00 9.50% 12.50% Required: 1. Compute the return on investment (ROI) for each division using the forthula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3, Assume that each division is presented with an investment opportunity that would yield a 10% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?Explanation / Answer
Division A
Division B
Division C
sales
12080000
35100000
25100000
average operating assets
3020000
7020000
5020000
Net operating income
531520
526500
627500
minimum required rate of return
9
12
12.5
1-
ROI =MARGIN*TURNOVER = OPERATING INCOME/SALES * SALES/ OPERATING ASSETS = OPERATING INCOME/AVERAGE OPERATING ASSETS
17.60%
7.50%
12.50%
2-
Residual income = net operating income- (average operating assets*minimum required rate of return
259720
-315900
0
3-
if performance is measured by ROI Division A would be selected as its ROI is 17.6% which is highest among all the ROI and its minimum required rate of return is also 9% only
4-
If performance is measure by residua lincome Division A would be selected as its residual income is maximum
5-
if investment opportunity with 10% exist Division B should accept for investment because its ROI is less than the opportunity return of 10%
ROI
Acceptance or rejection
A
0.176
Reject
B
0.075
Accept
C
12.5
Reject
6-
if investment opportunity with 10% exist Division B and C should accept for investment because their residual value is negative and zero
residual income
Acceptance or rejection
A
259720
Reject
B
-315900
Accept
C
0
Accept
Division A
Division B
Division C
sales
12080000
35100000
25100000
average operating assets
3020000
7020000
5020000
Net operating income
531520
526500
627500
minimum required rate of return
9
12
12.5
1-
ROI =MARGIN*TURNOVER = OPERATING INCOME/SALES * SALES/ OPERATING ASSETS = OPERATING INCOME/AVERAGE OPERATING ASSETS
17.60%
7.50%
12.50%
2-
Residual income = net operating income- (average operating assets*minimum required rate of return
259720
-315900
0
3-
if performance is measured by ROI Division A would be selected as its ROI is 17.6% which is highest among all the ROI and its minimum required rate of return is also 9% only
4-
If performance is measure by residua lincome Division A would be selected as its residual income is maximum
5-
if investment opportunity with 10% exist Division B should accept for investment because its ROI is less than the opportunity return of 10%
ROI
Acceptance or rejection
A
0.176
Reject
B
0.075
Accept
C
12.5
Reject
6-
if investment opportunity with 10% exist Division B and C should accept for investment because their residual value is negative and zero
residual income
Acceptance or rejection
A
259720
Reject
B
-315900
Accept
C
0
Accept
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.