Question

Coolbrook Company has the following information available for the past year: River Division Stream Division Sales revenue $ 1,216,000 $ 1,804,000 Cost of goods sold and operating expenses 881,000 1,296,000 Net operating income $ 335,000 $ 508,000 Average invested assets $ 1,090,000 $ 1,520,000 The company’s hurdle rate is 6.76 percent.

Required: 1. Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

	River Division Stream Division ROI % % Residual Income (Loss)

2. Recalculate ROI and residual income for each division for each independent situation that follows: (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

a. Operating income increases by 8 percent.

	River Division Stream Division ROI % % Residual Income (Loss)

b. Operating income decreases by 10 percent.

	River Division Stream Division ROI % % Residual Income (Loss)

c. The company invests $252,000 in each division, an amount that generates $106,000 additional income per division

	River Division Stream Division ROI % % Residual Income (Loss)

d. Coolbrook changes its hurdle rate to 4.76 percent.

	River Division Stream Division ROI % % Residual Income (Loss)

Answer 1

1. Calculate return on investment (ROI) and residual income for each division for last year

	River Division	Stream Division
ROI	30.74%	33.42%
Residual Income (Loss)	$ 261316	$ 405248

ROI

River Division = [ $335000 / $1090000 ] x 100 = 30.74%

Stream Division = [ $508000 / 1520000 ] x 100 = 33.42%

Residual Income (Loss)

River Division = $335000 – [ $1090000 x 6.76%] = $ 261316

Stream Division = $508000 – [ $1520000 x 6.67% ] = $ 405248

2(a). Recalculate ROI and residual income for each division for each independent situation that Operating income increases by 8 percent

	River Division	Stream Division
ROI	33.19%	36.09%
Residual Income (Loss)	$288116	$445888

ROI

River Division = [ [ $335000 X 1.08 ] / $1090000 ] x 100 = 33.19%

Stream Division = [ [ $508000 X 1.08 ] / 1520000 ] x 100 = 36.09%

Residual Income (Loss)

River Division = [ $335000 X 1.08 ] – [ $1090000 x 6.76%] = $288116

Stream Division = [ $508000X 1.08] – [ $1520000 x 6.67% ] = $445888

2(b)Recalculate ROI and residual income for each division for each independent situation that Operating income decreases by 10 percent

	River Division	Stream Division
ROI	27.66%	30.08%
Residual Income (Loss)	$ 227816	$ 354448

ROI

River Division = [ [ $335000 X 0.90 ] / $1090000 ] x 100 = 27.66%

Stream Division = [ [ $508000 X 0.90 ] / 1520000 ] x 100 = 30.08%

Residual Income (Loss)

River Division = [ $335000 X 0.90 ] – [ $1090000 x 6.76%] = $ 227816         

Stream Division = [ $508000X 0.90] – [ $1520000 x 6.67% ] = $ 354448

2(c)Recalculate ROI and residual income for each division for each independent situation that The company invests $252,000 in each division, an amount that generates $106,000 additional income per division

	River Division	Stream Division
ROI	32.86%	34.65%
Residual Income (Loss)	$350280.80	$494212.80

ROI

River Division =[$335000 + 106000 ] / [$1090000 + 252000] x 100

= 32.86%

Stream Division = [$508000 + 106000 ] / [1520000 + 252000] x 100

= 34.65%

Residual Income (Loss)

River Division = [$335000 + 106000] – [ $1342000 x 6.76%]

= $350280.80    

Stream Division = [$508000 + 106000] – [ $1772000 x 6.67% ]

= $494212.80

2(d). Recalculate ROI and residual income for each division for each independent situation that Coolbrook changes its hurdle rate to 4.76 percent

	River Division	Stream Division
ROI	30.74%	33.42%
Residual Income (Loss)	$283116	$435648

ROI

River Division = [ $335000 / $1090000 ] x 100 = 30.74%

Stream Division = [ $508000 / 1520000 ] x 100 = 33.42%

Residual Income (Loss)

River Division = $335000 – [ $1090000 x 4.76%] = $283116

Stream Division = $508000 – [ $1520000 x 4.67% ] = $435648