Hubbard Division of the Market Company has an opportunity to invest in a new pro

Question

Hubbard Division of the Market Company has an opportunity to invest in a new project. The project will yield an incremental operating income of $39,500 on average invested assets of $445,000. Hubbard currently has operating income of $200,000 on average invested assets of $2,090,000. Market Company requires a 7% rate of return on new projects.

a. What is Hubbard’s ROI before making an investment in the project? (Round your answer to 2 decimal places.)



b. What is Hubbard’s residual income before making an investment in the project?



c. What is Hubbard’s ROI after making the investment in the project? (Round your answer to 2 decimal places.)



d. What is Hubbard’s residual income after making the investment in the project?

Explanation / Answer

a) ROI = operating income/average invested assets = $200000/$2090000 = 9.57% b) $ Average operating assets 2090000 Net operating income 200000 Minimum required return on average assets 7% Residual income (net operating income-(minimum required rate of return*Average operating assets) 53700 c) ROI = operating income/average invested assets = ($200000+$39500)/($2090000+$445000) = 9.45% d) $ Average operating assets ($2090000+$445000) 2535000 Net operating income ($200000+$39500) 239500 Minimum required return on average assets 7% Residual income (net operating income-(minimum required rate of return*Average operating assets) 62050

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