Question

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows: Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets Division A Division B Division C $ 1,210,000 $ 1,281,000 $1,316,000 748, 000 941.00 Hui 956,000 83,000 71,000 72,000 67,000 60,000 60,000 11,587,000 2,823,600 4,640,000 Wescott is considering an expansion project in the upcoming year that will cost $7.2 million and return $653,000 per year. The project would be implemented by only one of the three divisions. Required: 1. Compute the ROI for each division. 2. Compute the residual income for each division. 3. Rank the divisions according to the ROI and residual income of each. 4-a. Compute the return on investment on the proposed expansion project. 4-b. Is this an acceptable project? 5. Without any additional calculations, state whether the proposed project would increase or decrease each division's ROI 6. Compute the new ROI and residual income for each division if the project was implemented within that division.

Answer 1

calculations 1 Division A Division B Division C Sales Revenue 1210000 1281000 1316000 a Cost of Goods Gold b 956000 748000 941000 Other Operating Expenses 71000 72000 83000 C Interest and taxes d 67000 60000 60000 e= a-(b+c+d) 209000 228000 Net Income 312000 f 2823000 4640000 Average Investment assets 11587000 g-e/f 2.69% 7.40% 4,91% ROI 2 Residual Income Net operating income (required rate x average assets) 312000 209000 228000 Net Income e Interest and taxes d 60000 60000 67000 Net operating Income Required Rate h-e+d 379000 269000 288000 8% 8% 8% i Residual Income j=h-(ix f) -547960 43160 -83200 3 Rank As per RO Rank As per Residual income 4a Return on proposed project 653000/7200000* 100 9.07% 4b YES Since the Rol of new project is much higher as compared to given division's ROI, the proposed 5 project would increase each divisions ROI 6 Net Income 312000 209000 228000 е Net income of new project k 653000 653000 653000 Combined Net Income -e+k 965000 881000 862000 Investment in new project 7200000 7200000 7200000 combined investment n-f+m 18787000 10023000 11840000 o=l/n 5.14% 8.60% 7.44% New ROI p=l+d 9тp-(n xі) New operating Income 1032000 922000 941000 Residual Income -470960 120160 -6200