The manager of the West Division of Beach Clothing Company is evaluating the acq

Question

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is not purchased? A. $202,000 B. $1,930,000 C. $2,110,000 D. $1,060,000

Explanation / Answer

West Div of Beach Clothing Situation if embroidery M/C not purchased a Budgeted Opearting Income               4,000,000 b Total Asssets            22,000,000 c NIBCL               1,000,000 d Net Invested Capital=b-c=            21,000,000 e Trageted Return @14%=               2,940,000 f Residual Income =a-e=               1,060,000 So answer D is correct

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