Question: Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desire
ID: 2414655 • Letter: Q
Question
Question: Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of return of 12.5 pe...
Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of return of 12.5 percent. The operating assets and income for each division are as follows:
ATI headquarters has $120,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:
Required
a-1. Calculate the ROI for each division.
a-2. Which division manager is currently producing the highest ROI?
b. Based on ROI, which division manager would be most eager to accept the $120,000 of investment funds?
c. Based on ROI, which division manager would be least likely to accept the $120,000 of investment funds?
d. Which division offers the best investment opportunity for ATI?
g. Calculate the residual income:
(1) At the corporate (headquarters) level before the additional investment.
(2) At the division level before the additional investment.
(3) At the investment level.
(4) At the division level after the additional investment.
ReqG1
ReqG2 to G4:
Divisions Operating Assets Operating Income Printer $ 540,000 $ 96,000 Copier 810,000 90,000 Fax 360,000 54,000 Total $ 1,710,000 $ 240,000Explanation / Answer
a) ROI OF DIVISIONS
a-2) Currently "Printer" division manager is producing highest ROI which is 5.3% (17.8-12.5) above company dezire.
B)&C)
In answering B&C we need to compare how new investment will effect each dividions overall ROI.
B)It is certain from comparing ROI's Copier division will eagerly accept investment as their overall ROI will raise by accepting project with higher ROI potential than division 11.1% and 13%(new)
C) To decide who going to reject investment based on ROI it will be the one withmost reduction in Overall ROI.
It will be Fax Division will reject the proposal as 0.75 ROI will fall.
D) For ATI it is Printer Division will give the highest retturn of $16,800 (120,000*14%) which is highest among other divisions.
E) Residual income is amount of money earned in excess of dezired level of return.
Residual Income= Operating Income-(Asset*minimum Return Required)
Residual Income/(loss)
(OP inc-asset*12.5%)
Division Asset Operating Income ROI ROI Printer 540,000 96,000 Return/Investment ie,(96,000/540,000) 17.8% Copier 810,000 90,000 90,000/810,000 11.1% Fax 360,000 54,000 54,000/360,000 15%Related Questions
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