Question

In: Accounting

Explain and contrast return on investment and residual income. Provide examples.

Explain and contrast return on investment and residual income. Provide examples.

Solutions

Expert Solution

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
Return on Investment is a performance measure that measures the amount of return on an investments, relative to investment costs.
Each of these measurements enables company management to determine the profit potential of investments in capital improvement, proposed projects or potential acquisitions
Example:
Investment in Equipment $500,000
Above investment will generate Revenue of 100000 and have to incur cost of 30000
Hence, Net Income 100000-30000 $ 70,000
ROI 70000/500000 14.00%
Residual Income:
Residual Income is income over and above minimum required return.
Considering above example, if minimum Required rate of return for company is 10%
Then Minimum Required Income 500000*10% $ 50,000
However, Actual Income $ 70,000
Residual Income 70000-50000 $ 20,000

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Explain and provide examples of Return on an Investment Income, Capital Appreciation). What are the differences...
Explain and provide examples of Return on an Investment Income, Capital Appreciation). What are the differences between expected return and required return.
Return on Investments and Residual income
Baird Home Maintenance Company earned operating income of $6,587,900 on operating assets of $58,300,000 during Year 2. The Tree Cutting Division earned $1,242,260 on operating assets of $6,940,000. Baird has offered the Tree Cutting Division $2,070,000 of additional operating assets. The manager of the Tree Cutting Division believes he could use the additional assets to generate operating income amounting to $432,630. Baird has a desired return on investment (ROI) of 9.30 percent.Required Calculate the return on investment for Baird, the...
1. Discuss how return on investment and residual income are used to evaluate investment center performance...
1. Discuss how return on investment and residual income are used to evaluate investment center performance 2. Compare and contrast capital budgets from operating budgets
What are the strengths and weaknesses of using Residual Income (RI), Return on Investment (ROI), or...
What are the strengths and weaknesses of using Residual Income (RI), Return on Investment (ROI), or Economic Value Added (EVA®) as methods to evaluate management performance? Which method would you like to be assessed by, if you were a manager? Would it make a difference if you were in charge of a department, plant, or major division? Why or why not? Support you answer with examples.
Problem 9-21B Comparing return on investment and residual income Gwinnett Corporation operates three investment centers. The...
Problem 9-21B Comparing return on investment and residual income Gwinnett Corporation operates three investment centers. The following financial statements apply to the investment center named Rite Division: RITE DIVISION Income Statement For the Year Ended December 31, 2018 Sales revenue $ 300,000    Cost of goods sold (180,000) Gross margin 120,000 Operating expenses    Selling expenses (15,000)    Administrative expense (5,000) Operating income 100,000 Nonoperating expense    Interest expense (10,000) Net income $ 90,000 RITE DIVISION Balance Sheet As of December 31, 2018 Assets...
Problem 9-21B Comparing return on investment and residual income Gwinnett Corporation operates three investment centers. The...
Problem 9-21B Comparing return on investment and residual income Gwinnett Corporation operates three investment centers. The following financial statements apply to the investment center named Rite Division: RITE DIVISION Income Statement For the Year Ended December 31, 2018 Sales revenue $ 300,000    Cost of goods sold ??(180,000) Gross margin 120,000 Operating expenses    Selling expenses (15,000)    Administrative expense (5,000) Operating income 100,000 Nonoperating expense    Interest expense ???(10,000) Net income $ 90,000 RITE DIVISION Balance Sheet As of December 31, 2018 Assets...
Describe the unique features of Residual Income, Return on Investment, Payback, Net Present Value and Internal...
Describe the unique features of Residual Income, Return on Investment, Payback, Net Present Value and Internal Rate of Return in measuring financial performance. Critically analyse the strengths and weaknesses of each measure. Comment on the problem that may be involved in comparing divisional performance. Discuss the approaches that can be used to avoid dysfunctional behavior which is motivated by accounting-based performance targets. Explain the return and risk relationship concept in finance. Describe a situation whereby a department’s attitude is: Risk...
6. RETURN ON INVESTMENT VS RESIDUAL INCOME AND TRANSFER PRICING    Part A The Checkers Ltd produces...
6. RETURN ON INVESTMENT VS RESIDUAL INCOME AND TRANSFER PRICING    Part A The Checkers Ltd produces a wide variety of sports equipment. Its newest division, Golf Technology, manufactures and sells a single product—AccuDriver, a golf club that uses global positioning satellite technology to improve the accuracy of golfers’ shots. The demand for AccuDriver is relatively insensitive to price changes. The following data are available for Golf Technology, which is an investment centre for Sports Equipment: Total annual fixed costs                                                         ...
Return on Investment and Residual Income Johnson Company has two sources of funds: long-term debt and...
Return on Investment and Residual Income Johnson Company has two sources of funds: long-term debt and equity capital. Johnson Company has profit centers in the following locations with the following net incomes and total assets: Net Income Assets Las Vegas $1,280,000 $4,000,000 Dallas 1,520,000 8,000,000 Tampa 2,360,000 12,000,000 a. Calculate ROI for each profit center and rank them from highest to lowest based on ROI. Round ROI to the nearest whole percentage. ROI Rank Las Vegas Answer Answer123 Dallas Answer...
Problem 9-22B Return on investment and residual income Roswell Company has operating assets of $8,000,000. The...
Problem 9-22B Return on investment and residual income Roswell Company has operating assets of $8,000,000. The company’s operating income for the most recent accounting period was $600,000. The Lawrence Division of Roswell controls $1,600,000 of the company’s assets and earned $144,000 of its operating income. Roswell’s desired ROI is 7 percent. Roswell has $600,000 of additional funds to invest. The manager of the Lawrence Division believes that his division could earn $50,400 on the additional funds. The highest investment opportunity...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT