Question

Baird Technologies, Inc. has three divisions. Baird has a desired rate of return of 13.0 percent. The operating assets and income for each division are as follows:

     

Divisions	Operating Assets				Operating Income
Printer	$	560,000			$	98,000
Copier		830,000				97,940
Fax		380,000				55,860
Total	$	1,770,000			$	251,800

Baird headquarters has $122,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:

	Expected ROIs for
Divisions	Additional Investments
Printer	14.5	%
Copier	13.5	%
Fax	12.5	%

Required

1. a-1. Calculate the ROI for each division.

2. a-2. Which division manager is currently producing the highest ROI?

3. b. Based on ROI, which division manager would be most eager to accept the $122,000 of investment funds?

4. c. Based on ROI, which division manager would be least likely to accept the $122,000 of investment funds?

5. d. Which division offers the best investment opportunity for Baird?

6. g. Calculate the residual income:

1. (1) At the corporate (headquarters) level before the additional investment.

2. (2) At the division level before the additional investment.

3. (3) At the investment level.

4. (4) At the division level after the additional investment.

Answer 1

a-1. ROI = Operating Income / Operating Assets

Printer Division = 98000 / 560000 = 17.50%

Copier Division = 97940 / 830000 = 11.80%

Fax Division = 55860 / 380000 = 14.70%

a-2. Printer Divisional Manager is currently producing the highest ROI.

b. Based on ROI, Copier division manager would be most eager of accepting the additional investment

c. Based on ROI, Printer Division manager would be least likely of acceptance of the additional investment.

d. Printer Division is the best investment oppurtunity for Baird.

g. Residual Income = Operating Income - Average Operating Assets*Required rate of return

1. At the corporate level = 251800 - 1770000*0.13 = 251800 - 230100 = $ 21,700

2. At the Division level before additional Investment

Printer Division = 98000 - 560000*0.13 = 98000 - 72800 = $ 25,200

Copier Division = 97940 - 830000*0.13 = 97940 - 107900 = - $ 9,960   

Fax Division = 55860 - 380000*0.13 = 55860 - 49400 = $ 6460

3. At the investment level Residual Income = Additional Investment (ROI - Required rate of return)

Printer Division = 122000*(14.50-13.00) = 122000*1.50% = $ 1,830

Copier Division = 122000*(13.50 - 13.00) = 122000*0.50% = $ 610

Fax Division = 122000 * (12.50- 13.00) = 122000*-0.50% = - $ 610

4. After Investment = Existing Residual Income + At the Investment Level

Printer Division = 25200 + 1830 = $ 27,030

Copier Division = -9960 + 610 = - $ 9,350

Fax Division = 6460 - 610 = $ 5,850