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Coolbrook Company has the following information available for the past year: River Division...

Question:

Coolbrook Company has the following information available for the past year:

River Division Stream Division
Sales Revenue $1,203,000 $1,806,000
Cost of goods sold and operating expenses $888,000 $1,294,000
Net operating income $315,000 $512,000
Average invested assets $1,130,000 $1,580,000

The company's hurdle rate is 7.76 percent.

Required:

1. Calculate the return on investment (ROI) and residual income for each division for last year. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

2. Recalculate ROI and residual income for each division for each independent situation that follows:

a. Operating income increases by 10 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

b. Operating income decreases by 11 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

c. The company invests $248,000 in each division, an amount that generates $106,000 additional income per division. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

d. Coolbrook changes its hurdle rate to 5.76 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

Return on Investment:

Return on investment (ROI) is a measure that calculates the return over an average amount invested; it's used to compute the profitability of a project. If the cost incurred to finance an average investment is less than the ROI, the project should be accepted; however, a project with an ROI that's lower than the cost of financing the project should be rejected. The cost of financing a project is also called the hurdle rate or the minimum rate of return. The excess of the net operating income over the minimum required return (hurdle rate * average investment) is known as residual income.

Answer and Explanation:

1. The return on investment (ROI) and residual income for each division for last year is as follows:

  • ROI = (Net Operating Income / Average Invested...

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Return on Investment: Definition, Formula & Example

from Intro to Business: Help and Review

Chapter 25 / Lesson 6
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