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In: Accounting

hamrock Investments has three divisions (Green, Clover, Seamrog) organized for performance evaluation purposes as investment centers....

hamrock Investments has three divisions (Green, Clover, Seamrog) organized for performance evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2020 for each of the three divisions are as follows:

Division

Operating income

Operating Assets -

Beginning of Year

Operating Assets -

End of Year

Green

$15,000,000

$90,000,000

$110,000,000

Clover

25,000,000

110,000,000

140,000,000

Seamrog

11,000,000

55,000,000

45,000,000

The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its operating income by $4,500,000.

1. Compute the current ROI for each division.

2. Compute the current residual income (RI) for each division.

3. Rank the divisions according to their current ROIs and in terms of their residual incomes.

ROI RANKING:

RESIDUAL INCOME RANKING:

. Determine the effects after adding the new project to each division's ROI and residual income (RI).

ROI EFFECTS:

Green –

Clover –

Seamrog-

RESIDUAL INCOME EFFECTS:

Green –

Clover –

Seamrog-

Assuming the managers are evaluated on either ROI or residual income (RI). Which divisions are pleased with the expansion and which ones are unhappy? Explain briefly.

Green –

Clover –

Seamrog-

Solutions

Expert Solution

ekkarill92 answered 2 years ago
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