Question

The following information applies to the questions displayed below] Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center) Average Invested Assets Investment Center Sales Income Electranics $42960,000 $3222000 18,904,000 2.363,000 s 17900,000 Sparting goods 13.900,000 Award: 3.00 points 1. Compute return on investtment for each department Using return on investment, which department is most efficlent at using assets to generate returns for the company? 2. Assume a target income level of 12 % of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company? 3. Assume the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Compute retum on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company? Return on Investment Choose Denominator Choose Numerator Return on Investment Retun on Investment Electronics Sporting Goods Which department is most efficient at using assets to generate retums for the сompany? Required 1 Required 2

Answer 1

Ans 1 Return on Investment : It is the profitability ratio and expressed in percentage. It helps in evaluating the efficiency of the investment. The formula is Net Income divided by assets invested. Return on Investment = Net Income / Average Invested Assets. Particulars Choose Numerator / Choose Denominator = Return on Investment Net Income / Average Invested Assets = Return on Investment Electronics $32,22,000 / $1,79,00,000 18.00% Sporting Goods $ 23,63,000 / $1,39,00,000 17.00% Electronics division is the most efficient at generating income using the invested assets as because its return is higher than Sporting goods. Ans 2 Residual Income : It is the income remaining after the deduction of the minimum rate of return. Its formula is Net Income - Required rate of return x capital employed Residual Income = Net Income - (cost of capital x average invested Assets) Particulars Electronics Sporting Goods Net Income $32,22,000 $23,63,000 Less: Target Net income ($21,48,000) ($16,68,000) ($17900000 x 12%] ($13900000 x 12%] Residual Income $10,74,000 $6,95,000 Electronics division is the most efficient at generating income using the invested assets as because its residual income is higher than Sporting goods. Ans 3 Yes, the investment opportunity should be accepted because the companies return is 12% and the return provided by this new investment is 14% which is higher than the company's target return