Question

Jordan Technologies, Inc. has three divisions. Jordan has a desired rate of return of 12.0 percent. The operating assets and income for each division are as follows:

     

Divisions	Operating Assets				Operating Income
Printer	$	630,000			$	104,580
Copier		900,000				99,900
Fax		450,000				63,000
Total	$	1,980,000			$	267,480

Jordan headquarters has $129,000 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:

	Expected ROIs for
Divisions	Additional Investments
Printer	13.5	%
Copier	12.5	%
Fax	11.5	%

Required

1. a-1. Calculate the ROI for each division.

2. a-2. Which division manager is currently producing the highest ROI?

3. b. Based on ROI, which division manager would be most eager to accept the $129,000 of investment funds?

4. c. Based on ROI, which division manager would be least likely to accept the $129,000 of investment funds?

5. d. Which division offers the best investment opportunity for Jordan?

6. g. Calculate the residual income:

1. (1) At the corporate (headquarters) level before the additional investment.

2. (2) At the division level before the additional investment.

3. (3) At the investment level.

4. (4) At the division level after the additional investment.

Answer 1

a-1)

	Formula	Printer	copier	Fax
ROI	Operating income /operating asset	104580/630000	99900/900000	63000/450000
		.166 or 16.60%	.111 or 11.1%	.14 or 14%

a-2)Printer division is producing highest return of 16.60%

b)Copier division will be eager to to accept $ 129000 of investment funds since the return provided by additional investment fund (12.5%) is greater than current ROI of 11.1%

c)Fax division is least likely to accept investment fund as its current ROI (16.6%) is much greater than ROI provided by additional investment funds.

d)

		Printer	copier	Fax
Asset invested		630000+129000=759000	900000+129000=1029000	450000+129000=579000
operating income		104580+(129000*13.5%) 121995	99900+(129000*12.5%) 116025	63000+(129000*11.5%) 77835
ROI		121995/ 759000= 16.07%	116025/1029000 .1128 or 11.28%	77835/579000 13.44%
ROI before		16.6% (decrease of .53%)	11.1% (increase .18)	14%   (decrease of .56%)

copier division since its ROI is increasing .