Question

 

Hubbard Division of the Market Company has an opportunity to invest in a new project. The project will yield an incremental operating income of $34,250 on average invested assets of $475,000. Hubbard currently has operating income of $215,000 on average invested assets of $2,025,000. Market Company requires a 4% rate of return on new projects.

a. What is Hubbard’s ROI before making an investment in the project? (Round your answer to 2 decimal places.)

b. What is Hubbard’s residual income before making an investment in the project?

c. What is Hubbard’s ROI after making the investment in the project? (Round your answer to 2 decimal places.)

d. What is Hubbard’s residual income after making the investment in the project?

 

Answer 1

 

:: Return on Investment = Net Income / Average Investment Asset.

a ) Return on Investment before invested in project = ( $ 215,000 * 100 ) / $ 2,025,000

a ) Return on Investment before invested in project = 10.62 %.

:: Residual Income = Net Operating income - ( Average operating asset * Rate of Return )

b) Residual Income before invested in project = $ 215,000 - ( $ 2,025,000 * 4 % )

b) Residual Income before invested in project = $ 134,000.

:: New Net operating income after invested in project = $ 215,000 + $ 34,250

:: New Net operating income after invested in project = $ 249,250.

:: New Average investment asset = $ 2,025,000 + $ 475,000

:: New Average investment asset = $ 2,500,000.

c) Return on investment after invested in project = ( $ 249,250 * 100 ) / $ 2,500,000

c) Return on investment after invested in project = 9.97 %.

d) Residual Income after invested in project = $ 249,250 - ( $ 2,500,000 * 4 % )

d) Residual Income after invested in project = $ 149,250.