Question

Exercise 12-9 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO12-1, LO12-2]

Selected sales and operating data for three divisions of three different companies are given below:

	Division A			Division B			Division C
Sales	$	6,000,000		$	10,000,000		$	8,000,000
Average operating assets	$	1,500,000		$	5,000,000		$	2,000,000
Net operating income	$	300,000		$	900,000		$	180,000
Minimum required rate of return		15	%		18	%		12	%

Required:
1.	Compute the margin, turnover and return on investment (ROI) for each division, using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round "Margin" answers to 2 decimal places.)

	Margin Turnover ROI Division A %    % Division B % % Division C % %

2.	Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign.)

	Division A Division B Division C Average operating assets Required rate of return Minimum required return Actual net operating income Minimum required return Residual income (loss)

3.	Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%.

a.	If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

Division A	Accept/Reject
Division B	Accept/Reject
Division C	Accept/Reject

b.	If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Division A	Accept/Reject
Division B	Accept/Reject
Division C	Accept/Reject

Answer 1