Question

Exercise 9-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO9-1, LO9-2]

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

	Division A			Division B			Division C
Sales	$	5,700,000		$	9,700,000		$	8,800,000
Average operating assets	$	1,140,000		$	4,850,000		$	1,760,000
Net operating income	$	273,600		$	853,600		$	180,400
Minimum required rate of return		17.00	%		17.60	%		14.00	%

Required:
1.	Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

       
margin turnover ROI

dividion A

divition B

divition C

2.	Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your Required Rate of Return percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Divition A Divition B Divition C

Average operating assets

required rate of return

required operating income

actual ooperating income

required operatiing income (above)

residual income (loss)

3.	Assume that each division is presented with an investment opportunity that would yield a 19% rate of return.

Divition A

Divition B

Divition C

a.	If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

Diviton A

Divition B

Divition C

b.	If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

DIvition A

Divition B

Divition C

Answer 1

Answer Margin ROI Turnover 4.80% 8.80% 2.05% 5.00 2.00 5.00 24.00% 17.60% 10.25% Division A Division B Division C 2. Residual Income Division A Division B Division C 1140000 17.00% 193800 273600 193800 79800 Average Operating Assets Required Rateof Return Required operating income Actula operating income Required operating income Residula Income 4850000 17.60% 853600 853600 853600 0 1760000 14.00% 246400 180400 246400 66000 3. If Perperformance is measured by ROI Division A Division B Division C 4. If Perperformance is measured by Residual Income Division A Division B Division C Reject Accept Accept Accept Accept Accept

Division C Division A Division B Sales Average Opearating Assets Net operating income Minimum Required Rate of Return 8800000 1760000 180400 14.00% 5700000 1140000 273600 17.00% 9700000 4850000 853600 17.60% Margin : Net operating Income / Net sales 273600 5700000 4.80% Net operating incone Sales Margin 853600 9700000 8.80% 180400 8800000 2.05% Assets Turnover ration : Netsales / Average Opearating Assets Sales Average Op Assets Turnover ration: 8800000 1760000 5700000 1140000 9700000 4850000 2 earating Assets ROI : Margin * Asset Turnover ratio 8.80% 4.80% 5 24.00% 2.05% 5 10.25% Margin Assets Turnover ration ROI: Margin Asset Turnover ratio 17.60%

Residual Income Division A Division B Division C 8500001760000 1140000 Average Operating Asset:s Required Rateof Return Required operating income Actula operating income Required operating income Residual income 17.00% 14.00% 853600246400 180400 246400 66000 17.60% 273600 853600 853600 0 79800

Note : For Any Further Clarification Plases Use the Comment Box.Thank You Very much