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). Investment Center Electronics Sporting goods Sales Income $42,240,000 $3,168,000 23, 120,000 2,312.000 Average Invested Assets $17,600,000 13.600.000 1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company? 2. Assume a target income level of 11% 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 15% 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 return 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 = Return on Investment Return on Investment Choose Numerator: 1 Choose Denominator: Net income / Average invested assets Electronics $ 3,168,000 / $ 17,600,000 Sporting Goods S 2 ,312,000 / s 13,600,000 Which department is most efficient at using assets to generate returns for the company? 18% 17% Electronics Required 1 Required 2 >

Answer 1

Solution 1:

Return on investment
Particulars	Choose Numerator	/	Choose denomerator	=	Return on Investment
Formula	Net Income	/	Average Invested Assets	=	Return on Investment
Electronic	$31,68,000.00	/	$1,76,00,000.00	=	18.00%
Sporting goods	$23,12,000.00	/	$1,36,00,000.00	=	17.00%
Which department is more efficient at using assets to generate returns for the company					Electronic

Solution 2:

Compuatation of Residual Income
Investment Center	Electronics	Sporting Goods
Net Income	$31,68,000.00	$23,12,000.00
Target Net Income	$19,36,000.00	$14,96,000.00
Residual Income	$12,32,000.00	$8,16,000.00
Which department generated the most residual income for the company		Electronic

Solution 3:

If performance is measured on the basis of ROI, then New investment opportunity should not be accepted because overall ROI after accepting will decrease.

If performance is measured on the basis of Residual Income, then New investment opportunity should be accepted as ROI (15%) offered by new investment opportunity is higher than minimum required return (11%).