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: Ants Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets Division A Division B Division C $ 1,280,000 $1,015,000 $1,000,000 791,000 745,000 732,000 69,000 57,000 58,000 53,000 46.000 46,000 9,165,000 2,165,000 3,562,000 eBook Print References 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 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

i cannot get 1B 4a or 6

Answer 1

Division C Requirement: 1 Division A Division B ROI = Net Operating Income Average Invested assets Net operating income 420000 213000 Average invested assets 9165000 2165000 ROI 4.58% 9.84% 218000 3562000 6.12% Requirement: 2 Residual income = Net operating income - (Average Invested Assets * Hurdel Rate) Net operating income (a) 420000 213000 218000 Average invested assets (b) 9165000 2165000 3562000 Hurdel rate 8.00% 8.00% 8.00% d = (b*c) 733200 173200 284960 Residual income (a-d) -313200 39800 -66960 Rank Requirement: 3 Ranks as per ROI and Residula Income Division A Division B Division C 1

Requirement: 4a Return = Net income / Average investement Net operating income 499000 Average invested assets 5500000 Return on proposed project 9.07% Requirement: 4b Yes Requirement: 5 Division A Division B Division C Increase Decrease Increase Division C Requirement: 6 Division A Division B ROI = Net Operating Income / Average Invested assets Net operating income 919000 712000 Average invested assets 14665000 7665000 ROI 6.27% 9.29% 717000 9062000 7.91% Residual income = Net operating income - (Average Invested Assets * Hurdel Rate) Net operating income (a) 919000 712000 717000 Average invested assets (b) 14665000 7665000 9062000 Hurdel rate (c) 8.00% 8.00% 8.00% d = (b*c) 1173200 613200 724960 Residual income (a-d) -254200 98800 -7960