Wescott Company has three divisions: A, B, and C. The company has a hurdle rate

Question

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

Wescott is considering an expansion project in the upcoming year that will cost $7.2 million and return $653,000 per year. The project would be implemented by only one of the three divisions.

Required:
1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))

3. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be entered with a minus sign. Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

Division A Division B Division C Sales revenue $ 1,210,000 $ 1,281,000 $ 1,316,000 Cost of goods sold 748,000 941,000 956,000 Miscellaneous operating expenses 83,000 71,000 72,000 Interest and taxes 67,000 60,000 60,000 Average invested assets 11,587,000 2,823,000 4,640,000 Answer is complete but not entirely correct. ROI Division Division Division 2.69 % 4.9196

Explanation / Answer

Solution 1 : amount in $ Division A Division B Division C Sales revenue 1,210,000 1,281,000 1,316,000 Cost of goods sold -748,000 -941,000 -956,000 Miscellaneous operating expenses -83,000 -71,000 -72,000 Interest and taxes -67,000 -60,000 -60,000 Net Profit (A) 312000 209000 228000 Average invested assets (B) 11,587,000 2,823,000 4,640,000 A/B*100=ROI 2.69 7.40 4.91

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