Question

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

	River Division			Stream Division
Sales revenue	$	1,211,000		$	1,808,000
Cost of goods sold and operating expenses		894,000			1,291,000
Net operating income	$	317,000		$	517,000
Average invested assets	$	1,060,000		$	1,510,000

   
The company’s hurdle rate is 6.01 percent.

Required:
1. Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

River     ROI_______%     Residual income (loss) _______

Stream ROI_________% Residual Income (loss) _______

2. Recalculate ROI and residual income for each division for each independent situation that follows: (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

a. Operating income increases by 9 percent.

River     ROI_______%     Residual income (loss) _______

Stream ROI_________% Residual Income (loss) _______

b. Operating income decreases by 11 percent.

River     ROI_______%     Residual income (loss) _______

Stream ROI_________% Residual Income (loss) _______

c. The company invests $241,000 in each division, an amount that generates $112,000 additional income per division.

River     ROI_______%     Residual income (loss) _______

Stream ROI_________% Residual Income (loss) _______

d. Coolbrook changes its hurdle rate to 4.01 percent.

River     ROI_______%     Residual income (loss) _______

Stream ROI_________% Residual Income (loss) _______

Answer 1