Question

Vaughan Company has 3 divisions with the following information:

	Division A	Division B	Division C
Sales	$750,000	$700,000	$360,000
Net Operating Income	$20,000	$34,000	$36,000
Average Operating Assets	$200,000	$500,000	$300,000
Minimum Required Rate of Return	12%	6%	11%

Assume that each division was presented with an investment opportunity that would yield a rate of return of 11.2%. If performance is being measured by ROI a.both division A and B will accept the project, b.only division A will accept the project, c.only division C will accept the project, d.both division B and C will accept the project, e.all of the divisions will accept the project, f.none of the divisions will accept the project, g.only division B will accept the project because a.11.2% exceeds the current rate of return, b.11.2% is more than Vaughan company's total company rate of return, c.11.2% is less than Vaughan company's total company rate of return, d.11.2% exceeds their minimum required rate of return

Answer 1

Based on the information available in the question, we can answer as follows:-

Step 1:- Calculate the Return on Investment for the 3 of the divisions of Vaughan Company

Particulars	Division A	Division B	Division C
Net Operating Income	20,000	34,000	36,000
Average Operating Assets	200,000	500,000	300,000
Return On Investment	10.00%	6.80%	12.00%

Each Division was presented with an investment opportunity of providing a yield of 11.2%. Based on the calculation above, the correct answer is Option A - Both Division A and B will accept the project. It is because the investment opportunity provides a return of 11.2% as against the current return on investment of 10% and 6.80% earned by Division A and Division B Respectively. Hence, since the investment proposal promises a higher rate of return, they will be accepted by Both Division A and Division B .

Option B is incorrect as even Division B will accept the project.

Option C is incorrect as Division C will not accept the project because they are already earning a higher Return on investment.

Option D is incorrect as C will not accept the project.

Option E is incorrect as C will not accept the project.

Option F is incorrect as we have the answer at Option A.

Option G is incorrect as Division B will not accept the project.

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