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:

	Division A		Division B		Division C
Sales revenue	$	1,250,000	$	1,129,000	$	1,140,000
Cost of goods sold		772,000		829,000		828,000
Miscellaneous operating expenses		75,000		63,000		64,000
Interest and taxes		59,000		52,000		52,000
Average invested assets		10,203,000		2,447,000		4,024,000

Wescott is considering an expansion project in the upcoming year that will cost $7 million and return $565,000 per year. The project would be implemented by only one of the three divisions.


Required:
1. Compute the ROI for each division.

2. Compute the residual income for each division.

3. Rank the divisions according to the ROI and residual income of each.

4-a. Compute the return on investment on the proposed expansion project.

4-b. Is this an acceptable project?

5. Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI.

6. Compute the new ROI and residual income for each division if the project was implemented within that division.

Answer 1