Perez Technologies, Inc. has three divisions. Perez has a desired rate of return
ID: 2583604 • Letter: P
Question
Perez Technologies, Inc. has three divisions. Perez has a desired rate of return of 12.5 percent. The operating assets and income for each division are as follows:
Perez headquarters has $131,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:
Required
a-1. Calculate the ROI for each division.
a-2. Which division manager is currently producing the highest ROI?
b. Based on ROI, which division manager would be most eager to accept the $131,000 of investment funds?
c. Based on ROI, which division manager would be least likely to accept the $131,000 of investment funds?
d. Which division offers the best investment opportunity for Perez?
g. Calculate the residual income:
(1) At the corporate (headquarters) level before the additional investment.
(2) At the division level before the additional investment.
(3) At the investment level.
(4) At the division level after the additional investment.
Divisions Operating Assets Operating Income Printer $ 650,000 $ 106,600 Copier 920,000 100,280 Fax 470,000 64,860 Total $ 2,040,000 $ 271,740Explanation / Answer
Answer:
a-1. Calculate the ROI for each division.
ROI
=Operating income/ Operating assets
Divisions
Operating Assets
Operating Income
ROI
A
B
B/A
Printer
650,000
106,600
16.40%
Copier
920,000
100,280
10.90%
Fax
470,000
64,860
13.80%
___________________________________________________________
a-2. Which division manager is currently producing the highest ROI?
Printer division manager is currently producing the highest ROI
______________________________________________________
b. Based on ROI, which division manager would be most eager to accept the $131,000 of investment funds?
Copier division manager would be most eager to accept the $131,000 of investment funds because expected ROI is 13% for additional investmetn, which is more then current ROI =10.90%
_____________________________________________________________
c. Based on ROI, which division manager would be least likely to accept the $131,000 of investment funds?
Fax manager would be least likely to accept the $131,000 of investment funds because expected ROI is 12% for additional investmetn, which is less then current ROI =13.80%
_________________________________________________________________________
d. Which division offers the best investment opportunity for Perez?
Answer:
The printer division offers the best investment opportunity for Perez
___________________________________________________________________
g. Calculate the residual income:
(1) At the corporate (headquarters) level before the additional investment.
=271,7440- (2040,000*12.5%)
=$16,740
(2) At the division level before the additional investment.
Divisions
Operating Assets
Operating Income
Required
retun%
Required
retun%
Residual
Income
A
B
C
D=A*C
B-D
Printer
650,000
106,600
13%
84500
22,100
Copier
920,000
100,280
13%
119600
-19,320
Fax
470,000
64,860
13%
61100
3,760
(3) At the investment level.
A
B
C
D=B_C
E=A*D
Printer
131000
14.00%
12.5%
1.500%
1965
Copier
131000
13.00%
12.5%
0.500%
655
Fax
131000
12.00%
12.5%
-0.500%
-655
(4) At the division level after the additional investment.
Divisions
Residual
Income
A
B
C=A+B
Printer
25350
1,965
27,315
Copier
-14720
655
-14,065
Fax
6110
-655
5,455
Divisions
Operating Assets
Operating Income
ROI
A
B
B/A
Printer
650,000
106,600
16.40%
Copier
920,000
100,280
10.90%
Fax
470,000
64,860
13.80%
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