Evaluating New Investments Using Return on Investment (ROI) and Residual Income Selected sales...

Question:

Evaluating New Investments Using Return on Investment (ROI) and Residual Income.

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

Division A Division B Division C
Sales $12,000,000 $14,000,000 $25,000,000
Average operating assets $3,000,000 $7,000,000 $5,000,000
Net operating income $600,000 $560,000 $800,000
Minimum required rate of return 14% 10% 16%

1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover.

2. Compute the residual income for each division.

3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.

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

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

Return On Investment:

Return on investment compares profit made by the investment with the initial cost incurred. The formula to calculate return on investment is

ROI = Net income/ Initial cost

Answer and Explanation:

(1)

Evaluate the net income ratio of division A to decide the return on investment of division An as given beneath:

{eq}Net \ income \ ratio \ = \...

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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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