Wescott Company has three divisions: A, B, and C. The company has a hurdle rate

Question

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

Wescott is considering an expansion project in the upcoming year that will cost $5 million and return $450,000 per year. The project would be implemented by only one of the three divisions.

Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be indicated by a minus sign. Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

Division A ROI: Residual Income:

Division B ROI: Residual Income:

Division C ROI: Residual Income:   

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

Explanation / Answer

compute residual income

residual income = operating income - ( desired ROI * average asset investment )

first of lets calculate operating income , it is sales - cost of goods sold - other operating expense but before intt and taxes

                                             div A                                         div b                                       div C

Sales revenue              $1,255,000                                   920,000                                   898,000

cost of goods sold          (776,000)                                 (675,000)                                  (652,000)

misc operating exp            (64,000)                                  (52,000)                                     (53,100)

operating income           $ 415,000                                   $193000                                    $ 192,900

hurdle rate is the required rate of return

So ROI desired                8%

Average assest invest   $8,300,000                            $1,930,000                                       3,215,000

Residual income for div A = $415,000 - (8% * 8,300,000)

                                           = $(249,000)

                                  div b = 193,000 - ( 8% * 1,930,000)

                                          = $38,600

                                   Div c = 192,900 - ( 8% * 3,215,000)

                                            = $(64,300)

(6) ROI = change in profits / average capital investment

             = $450,000 + 415,000/ 8,300,000 + 5000,000 = 6.50%

DIVB

    = $450,000 + 193,000/ 1930,000+ 5000,000  = 9.28%

DivC

= $450,000 +192,900/ 500,000+3,215,000 =   7.83%

new residual income

Div A = 865,000 - ( 8% * 13,300,000)

          = ($199,000)

Div B = 643,000 - ( 8% * 6930,000)

         = $88,600

Div C = 642,900 - ( 8% * 8,215,000)

          = ($14,300)

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.