Question

Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division: Sales revenue Cost of goods sold and operating expenses Net operating income Average invested assets Fruit Division Flower Division $ 660,000 $ 990,000 495,000 742,500 $ 165,000 $ 247,500 $ 2,062,500 $ 1,375,000 Orange has established a hurdle rate of 5 percent. Required: 1-a. Compute each division's return on investment (ROI) and residual income for last year. 1-b. Determine which manager seems to be performing better. 2. Suppose Orange is investing in new technology that will increase each division's operating income by $120,000. The total investment required is $1,500,000, which will be split evenly between the two divisions. Calculate the ROI and residual income for each division after the investment is made 3. Determine whether both managers will support the investment.

Answer 1

в 1 1-a 2 Particulars Fruit Flower 3 ROI 8.00% 18.00% 4 Residual Income 61875 178750 5 6 1-b Flower department seems to be working good because of the ROI and residual value being higher 8 92 10 Particulars Fruit Flower 11 ROI 10.13% 17.29% 12 Residual Income 144375 261250 13 14 3 Fruit Dept manager will accept the investment because it 15 increases its ROI & Residual income Flower Dept manager will not accept the investment because it 16 decreases its ROI 17 18

AB 1 1-a 2 Particulars Fruit 3 ROI |=165000/2062500 4 Residual Income =165000-(2062500*5%) Flower =247500/1375000 =247500-(1375000*5%) 5 61-b Flower department seems to be working good because of the ROI and residual value being higher 8 9 2 10 Particulars Fruit 11 ROI =(165000+120000)(2062500+750000) 12 Residual Income =(165000+120000)-(2062500+750000)*5% 13 14 3 Flower =(247500+120000)/(1375000+750000) =(247500+120000)-(1375000+750000)*5% Fruit Dept manager will accept the investment because it increases its ROI & Residual income Flower Dept manager will not accept the investment because it decreases its ROI