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 1,280,000 791,000 69,000 53,000 9,165,000 Division B 1,015,000 745,000 57,000 46,000 2,165,000 Division C 1,008,000 732,000 58,000 46,000 3,562,000 Wescott is considering an expansion project in the upcoming year that will cost $5.5 million and return $499,000 per year. The project would be implemented by only one of the three divisions. Required: 1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.)) ROI % Division A Division B Division C

Answer 1

		Division A	Division B	Division C
	Sales	1280000	1015000	1008000
	Cogs	791000	745000	732000
	Miscellaneous operating expenses	69000	57000	58000
	Interest and Taxes	53000	46000	46000
	Net Income	367000	167000	172000
	Average Invested Assets	9165000	2165000	3562000
1)		ROI		2)		Residual Income/ Loss
	Division A	4.004%			Division A		Division B	Division C
	Division B	7.714%			Net Income	367000	167000	172000
	Division C	4.829%			Less:
					Hurdle Rate *	733200	173200	284960
					Average Investments
					Residual Income	-366200	-6200	-112960

3)		ROI	Residual Income / Approach
	Division A	3rd	3rd
	Division B	1st	1st
	Division C	2nd	2nd
4)	Return on Investment of Proposed	Return	499000	9.0727%
a)	Expansion Project	Project Cost	5500000
b)	Yes it is an acceptable project
		ROI
5)	Division A	Increased
	Division B	Increased
	Division C	Increased
6)		Division A	Division B	Division C
	Income from division	367000	167000	172000
	Income from project	499000	499000	499000
	Total Income	866000	666000	671000
	Average Investments	9165000	2165000	3562000
	Project Investment	5500000	5500000	5500000
	Total Investments	14665000	7665000	9062000
	ROI
	Total Income	866000	666000	671000
	Total Investments	14665000	7665000	9062000
		5.9%	8.7%	7.4%
	Residual Income
	Total Income	866000	666000	671000
	Less:
	Investments	14665000	7665000	9062000
	Hurdle Rate	8%	8%	8%
	Total Income - Hurdle Rate * Total Investments
	Residual Income	-307200	52800	-53960