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ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had...

ROI and Residual Income:
Impact of a New Investment
The Mustang Division of Detroit Motors had an operating income of $900,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent.

(a) Compute the return on investment. (Round your answer to three decimal places.)
Answer

(b) Compute the residual income.
$Answer

(c) The Mustang Division has an opportunity to increase operating income by $250,000 with an $750,000 investment in assets.

1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your answer to three decimal places.)
Answer

2. Compute the Mustang Division's residual income if the project is undertaken.
$Answer

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Expert Solution

A )  Return on Investment = Operating income / Net Assets

A )  Return on Investment = ( $ 900,000 * 100 ) / $ 4,000,000

A )  Return on Investment = 22.5 %.

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B) Residual income = Operating income - ( Net Assets * Rate of Return )

B) Residual income = $ 900,000 - ( $ 4,000,000 * 16 % )

B) Residual income = $ 260,000.

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>> New Operating Income = $ 900,000 + $ 250,000 = $ 11,50,000.

>> New Net Assets = $ 4,000,000 + $ 750,000 = $ 4,750,000

C ) New Return on Investment = Operating income / Net Assets

C ) New Return on Investment = ( $ 11,50,000 * 100 ) / $ 4,750,000

C ) New Return on Investment = 24.21 %.

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D) New Residual income = Operating income - ( Net Assets * Rate of Return )

D) New Residual income = $ 11,50,000 - ( $ 4,750,000 * 16 % )

D) New Residual income = $ 390,000

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ekkarill92 answered 2 years ago
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