Question

Question 10 Partially correct P Flag question Mark 0.50 out of 1.00 ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had an operating income of $900,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent. (a) Compute the return on investment. (Round your answer to three decimal places.) 0.225 (b) Compute the residual income. $ 260,000 (c) The Mustang Division has an opportunity to increase operating income by $250,000 with an $800,000 investment in assets. 1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your answer to three decimal places.) 23.959 2. Compute the Mustang Division's residual income if the project is undertaken. $ 0 Check

Answer 1

Solution Operating Income Net Assets Target rate of return $900,000 $4,000,000 16% Required (a): Computation of return on investment Return on investment = Operating income Net Assets $900,000 $4,000,000 11 0.225 Return on investment 0.225 Required (b): Computation of residual income Oprating Income Targeted income on investment ($4,000,000 x 16%) Residual Income ($900,000 - $640,000) $900,000 $640,000 $260,000 Residual Income $260,000 Required (c-1): Computation of return on investment, if project is undertaken Total Operating income ($900,000 + $ 250,000) Total net assets ($4,000,000 + $800,000) $1,150,000 $4,800,000 Return on investment $1,150,000 $4,800,000 = 0.240 Return on investment 0.240 Required (-2): Computation of residual income, if project is undertaken Total Operating income ($900,000+$250,000) Targeted income on investment ($4,800,000 x 16%) Residual Income ($1,150,000 - $768,000) $1,150,000 $768,000 $382,000 Residual Income $382,000