The Western Division of Claremont Company had net operating income of $150,000 a

Question

The Western Division of Claremont Company had net operating income of $150,000 and average invested assets of $553,000. Claremont has a required rate of return of 14.25 percent. Western has an opportunity to increase operating income by $46,000 with a $100,000 investment in assets. Compute Western Division's return on investment and residual income currently and if it undertakes the project. (Enter your ROl answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%). Round your Residual Income (Loss) answers to the nearest whole dollar.) Currently: Return on Investment (ROI) Residual Income (Loss) Proposed Projecti Return on Investment (ROI) Residual Income (Loss)

Explanation / Answer

Currently: ROI = Net operating income/Average invested assets = 150000/553000= 27.12% Residual income(loss) = 150000-(553000*14.25%)= 71198 Proposed project: ROI = Net operating income/Average invested assets = 46000/100000= 46.00% Residual income(loss) = 46000-(100000*14.25%)= 31750

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