Question

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

Wescott is considering an expansion project in the upcoming year that will cost $5.3 million and return $477,000 per year. The project would be implemented by only one of the three divisions.

Division A Division B Division C

Sales revenue $ 1,270,000 $ 977,000 $ 964,000 Cost of goods sold 785,000 717,000 700,000 Miscellaneous operating expenses 67,000 55,000 56,000 Interest and taxes 51,000 44,000 44,000 Average invested assets 8,819,000 2,071,000 3,408,000

Required:
1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))

Division A:

Division B:

Division C:

2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.)

Division A:

Division B:

Division C:

3. Rank the divisions according to the ROI and residual income of each.

Division A:

Division B:

Division C:

4-a. Compute the return on investment on the proposed expansion project. (Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))

	Return on Investment of Proposed Expansion Project %

4-b. Is this an acceptable project?

Yes or No

5. Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI.

Division A:

Division B:

Division C:

6. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be entered with a minus sign. Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

ROI & Residual Income (Loss) for each division:

Division A:

Division B:

Division C:

Answer 1