Question

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Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).

Investment Center	Sales			Income			Average Invested Assets
Electronics	$	42,250,000		$	3,211,000		$	16,900,000
Sporting goods		19,350,000			2,322,000			12,900,000

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 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?

	Return on Investment Choose Numerator: / Choose Denominator: = Return on Investment / = Return on Investment Electronics / = Sporting Goods / = Which department is most efficient at using assets to generate returns for the company?

Answer 1

Part-1: Return on Investment
	Choose Numerator:	/	Choose Denominator:	=	Return on Investment
		/		=	Return on Investment
Electronics	$3,211,000	/	$16,900,000	=	19%
Sporting Goods	$2,322,000	/	$12,900,000	=	18%
Electronic department is most efficient at using assets to generate returns for the company
Part-2
	Income	-	Target Income	=	Residual income
Electronics	$3,211,000		$2,028,000	=	$1,183,000
			(16900000*12%)
Sporting Goods	$2,322,000		$1,548,000	=	$774,000
			(12900000*12%)
Electronic department generated the most residual income for the company

Part-3: No, new investment opportunity should not accepted