Question

PA10-1 Calculating Return on Investment, Residual Income, Determining Effect of Changes in Sales, Expenses, Invested Asset, Hurdle Rate on Each [LO 10-4, 10-5] Coolbrook Company has the following information available for the past year Stream Division $ 1,808, 1,287,000 River Division S 1,211,000 B87,000 Sales revenue Cost of goods sold and operating expenses 324,000 521,000 Net operating income $ 1,560,000 $ 1,150,000 Average invested assets The company's hurdle rate is 6.76 percent. Required: 1. Calculate retum on investment (ROI) and residual income for each division for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (.e., 0.1234 should be entered as 12.34 %.)) River Stream Division 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 10 percent. River Division Stream Division ROI Residual Income (Loss)

Answer 1

Average Opearating Assets 1150000 1560000 Net operating income 324000 521000 Minimum Required Rate of Return 6.76% 6.76% ROI : operating income operating assets Residula income: Operating income- Minimum required income River Division Stream Division 1.) ROI and residual income ROI 28.17% 33.40% Residual Income 246260 415544) 2. a)Operating income increase by 10% Net operating income 3564001 573100 ROI 30.99% 36.74% Residual Income 278660 467644 B) Operating income Decrease by 8% Net operating income 298080 479320 ROI 25.92% 30.73% Residual Income 220340 373864) C) Invest 249000 ti increase Adational Income of 120,000 Net operating income 444000 6410001 Average Opearating Assets 1399000 1809000 ROI 31.74% 35.43% Residual Income 349428 518712 D) Reduce the Hurdel Rate to 4.76% Minimum Required Rate of Return 4.76% 4.76% ROI 28.17% 33.40% Residual Income 269260 446744