Question

I answer all of them but the 6th required I could not.

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 $1,270,000 785,000 67.000 51.000 8,819,000 Division B $ 977,000 717.000 55.000 44.000 2,071,000 Division C $ 964,000 700,000 56,000 44,000 3,400,000 Wescott is considering an expansion project in the upcoming year that will cost $5.3 million and return $477,000 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 of the project was implemented within that division.

Answer 1

	Division A	B	C
Sales	1270000	977000	964000
COGS	785000	717000	700000
Misc Operating Expense	67000	55000	56000
Interest and Taxes	51000	44000	44000
Net Operating Income	418000	205000	208000
Average invested assets	8819000	2071000	3408000
ROI = Operating income/Invested assets	4.74%	9.90%	6.10%
Residual Income = operating income - Average assets*Required rate of return	-287520	39320	-64640
Rank as per ROI	3	1	2
Rank as per Residual Income	3	1	2
4-a ROI	9.00%
Yes, since ROI is higher than hurdle rate
	Division A	B	C
	Increase	Reduce	Increase
ROI	6.34%	9.25%	7.87%
Residual Income	-234520	92320	-11640

А 2 Sales 3 COGS 4. Misc Operating Expense 5 Interest and Taxes 6 Net Operating Income 7 Average invested assets Division A 1270000 785000 67000 51000 =B2-B3-B4 8819000 977000 717000 55000 44000 =C2-C3-C4 2071000 964000 700000 56000 44000 =D2-D3-D4 3408000 8 =B6/B7 =B6-B7*8% =C6/07 =C6-C7*8% 1 =D6/D7 =D6-D7*8% 2 9 ROI = Operating income/Invested assets 10 Residual Income = operating income - Average assets *Required rate of return 11 Rank as per ROI 12 Rank as per Residual Income 13 14 4-a ROI 15 Yes, since ROI is higher than hurdle rate 16 =477000/5300000 17 Division A Increase B Reduce Increase 18 19 20 ROI 21 Residual Income =(B6+477000)/(B7+5300000) =(C6+477000)/(C7+5300000) =(D6+477000)/(D7+5300000) =(B6+477000)-(B7+5300000)*8% =(C6+477000)-(C7+5300000)*8% =(D6+477000)-(D7+5300000)*8%