Question

Question: Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of return of 12.5 pe...

Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of return of 12.5 percent. The operating assets and income for each division are as follows:

     

Divisions	Operating Assets				Operating Income
Printer	$	540,000			$	96,000
Copier		810,000				90,000
Fax		360,000				54,000
Total	$	1,710,000			$	240,000

ATI headquarters has $120,000 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	14.0	%
Copier	13.0	%
Fax	12.0	%

Required

a-1. Calculate the ROI for each division.

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

b. Based on ROI, which division manager would be most eager to accept the $120,000 of investment funds?

c. Based on ROI, which division manager would be least likely to accept the $120,000 of investment funds?

d. Which division offers the best investment opportunity for ATI?

g. Calculate the residual income:

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

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

(3) At the investment level.

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

ReqG1

residual income

ReqG2 to G4:

		residual income (loss)
(2)	Printer Division
	Copier Division
	Fax Division
(3)	Printer Division
	Copier Division
	Fax Division
(4)	Printer Division
	Copier Division
	Fax division

Answer 1

a) ROI OF DIVISIONS

Division	Asset	Operating Income	ROI	ROI
Printer	540,000	96,000	Return/Investment ie,(96,000/540,000)	17.8%
Copier	810,000	90,000	90,000/810,000	11.1%
Fax	360,000	54,000	54,000/360,000	15%

a-2) Currently "Printer" division manager is producing highest ROI which is 5.3% (17.8-12.5) above company dezire.

B)&C)

In answering B&C we need to compare how new investment will effect each dividions overall ROI.

Division	Current ROI	Earning currently	New project earning$'000	New overall ROI $'000	Reduction in ROI
Printer	17.8	96,000	(120*14%)=16.8	(96+16.8)/(120+540)=17.09	(0.71)
Copier	11.1	Will Accept as investment with more ROI 13%
Fax	15	54,000	(120*12%)=14.4	(54+14.4)/(120+360)=14.25	(0.75)

B)It is certain from comparing ROI's Copier division will eagerly accept investment as their overall ROI will raise by accepting project with higher ROI potential than division 11.1% and 13%(new)

C) To decide who going to reject investment based on ROI it will be the one withmost reduction in Overall ROI.

It will be Fax Division will reject the proposal as 0.75 ROI will fall.

D) For ATI it is Printer Division will give the highest retturn of $16,800 (120,000*14%) which is highest among other divisions.

E) Residual income is amount of money earned in excess of dezired level of return.

Residual Income= Operating Income-(Asset*minimum Return Required)

		Operating Income	(Asset*12.5%(given)	Residual Income/(loss) (OP inc-asset*12.5%)
1)Corporate level(totals)		240,000	(1,710,000*12.5%)=213,750	26,250
2) before investment	printer	96,000	(540,000*0.125)=67,500	28,500
	Copier	90,000	(810,000*.125)=101,250	(11,250)
	Fax	54,000	(360,000*.125)=45,000	9,000
3)New Investment	Printer	(above)16,800	(120,000*0.125)=15,000	1,800
	Copier	(120,000*13%) =15600	(120,000*.125)='"	600
	Fax	14,400	(120,000*.125)="	(600)
4) After investment	Printer	(96+16.8)=112,800	(540+120)*0.125=82,500	30,300
	Copier	(90+15.6)=105,600	(810+120)*0.125=116,250	(10,650)
	Fax	(54+14.4)=68,400	(360+120)*0.125=60,000	8,400