Question

Coolbrook Company has the following information available for the past year:   

	River Division			Stream Division
Sales revenue	$	1,206,000		$	1,805,000
Cost of goods sold and operating expenses		893,000			1,291,000
Net operating income	$	313,000		$	514,000
Average invested assets	$	1,090,000		$	1,510,000

   
The company’s hurdle rate is 7.26 percent.

c. The company invests $253,000 in each division, an amount that generates $116,000 additional income per division

River Division

ROI_______%

Residual income (loss)______

Stream Division

ROI______%

Residual Income (loss)_______

d. Coolbrook changes its hurdle rate to 5.26 percent.

River Division

ROI_____%

Residual Income (loss)_______

Stream Division

ROI______%

Residual Income (loss)________

Answer 1

Solution:

Question C:

River Division:

Net operating income = $313,000 + $116,000

= $429,000

Invested assets  = $1,090,000+$253,000

= $1,343,000

Return on investment = $429,000/$1,343,000*100

Return on investment = 31.94%

Residual income =  $429,000 - ($1,343,000 * 7.26%)

= $429,000-$97,502

Residual income = $331,498

Stream Division:

Net operating income = $514,000 + $116,000

= $630,000

Invested assets = $1,510,000 + $253,000

= $1,763,000

Return on investment = $630,000 / $1,763,000 * 100

Return on investment = 35.73%

Residual income = $630,000 - ($1,763,000*7.26%)

= $630,000 - $127,994

Residual income = $502,006

.

Question D:

River Division:

Return on investment = 313,000 / 1,090,000 *100

Return on investment = 28.72%

Residual income = 313,000 - (1,090,000*5.26%)

= 313,000 - 57,334

Residual income = 255,666

Stream Division:

Return on investment = 514,000 / 1,510,000 *100

Return on investment = 34.04%

Residual income = 514,000-(1,510,000 * 5.26%)

= 514,000 - 79,426

Residual income = 434,574