Question

The current profit for a subunit is $36,000. Its current invested capital is $200,000. The subunit is considering purchasing for $20,000 equipment that will increase annual profit by an estimated $2,800. The firm's cost of capital is 12%. If the equipment is purchased, what will be the increase in residual income of the subunit?

Select one:

a. 4%

b. $400

c. $16,000

d. $2,800

The current income for a subunit is $36,000 on sales revenues of $360,000. Its current invested capital is $200,000. The subunit's invested capital will be reduced $20,000, and the reduction will not change the subunits' income or sales revenues. If the reduction in invested capital occurs, what will be the new return on investment (ROI) for the subunit?

Select one:

a. 16%

b. 20%

c. 22%

d. 19.08%

The current income of the subunit is $42,000. Its current invested capital is $280,000. If the sales margin is increased to 8% and the capital turnover remains constant at 3, what will be the subunit's new return on investment (ROI)?

Select one:

a. 45%

b. 24%

c. 21%

d. 15%

Answer 1

As per the Chegg Policy, Only one question can be answer at a time. So I am giving the answer of first question. Please ask the further question's separately. Thanks.

1. Residual income = Operating profit - Invested capital * cost of capital

Residual Income before purchase: $36,000 - [$200,000 x .12] = $12,000

Residual Income after purchase: $38,800 - [$220,000 x .12] = $12,400

Increase = $12,400 - $12,000 = $400

Option b. is correct answer.