Question

Residual Income and Investment Decisions Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division. Furniture Division: Year 1 Sales $35,500,000 $37,500,000 Operating income 1,440,000 1,520,000 Average operating assets 9,290,000 9,290,000 Houseware Division: $11,800,000 $12,900,000 Sales Operating income Average operating assets 640,000 5,550,000 500,000 5,550,000 At the end of Year 2, the manager of the Houseware Division is concerned about the division's performance. As a result, he is considering the opportunity to invest in two independent projects. The first is called the Espresso-Pro; it is an in-home espresso maker that can brew regular coffee as well as make espresso and latte drinks. While the market for espresso drinkers is small initially, he believes this market can grow, especially around gift-giving occasions. The second is the Mini-Prep appliance that can be used to do small chopping and dicing chores that do not require a full-sized food processor without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows: Espresso-Pro $28,000 Mini-Prep $15,200 Operating income

Answer 1

Part-1

Espresso-Pro ROI (28000/160000)= 17.5%

Mini-prep ROI (15200/110000)=13.82%

Part-2

a Espresso pro is added (28000+500000)/(160000+5550000)=9.25%

b Mini prep is added (15200+500000)/(110000+55500000)=9.10%

c Both are added (15200+28000+500000)/(160000+110000+5550000)=9.33%

d Status quo (500000/5550000)=9.009%

Espresso-Pro should be chosen as ROI is highest