#2 Return on Investment and residual income LO 9-2,9-3 Sezer Technologies, Inc.
ID: 2457454 • Letter: #
Question
#2
Return on Investment and residual income LO 9-2,9-3 Sezer Technologies, Inc. (STI), has three divisions. STI has a desired rate of return of 10.5 percent. The operating assets and income for each division are as follows: STI headquarters has $124,000 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: Calculate the ROI for each division. Which division manager is currently producing the highest ROI? Based on ROI, which division manager would be most eager to accept the $124,000 of investment funds? Based on ROI, which division manager would be least likely to accept the $124,000 of investment funds? Which division offers the best investment opportunity for STI? Calculate the residual income: At the corporate (headquarters) level before the additional investment. At the division level before the additional investment. At the investment level. (Loss amounts should be indicated by a minus sign.) At the division level after the additional investment. (Loss amounts should be indicated by a minus sign.)Explanation / Answer
a-1)
Printer Division
ROI = Operating Income/Operating Asset
ROI = 86022/531000
ROI = 16.2%
Copier Division
ROI = Operating Income/Operating Asset
ROI = 71195/819000
ROI = 8.7%
Fax Division
ROI = Operating Income/Operating Asset
ROI = 56363/359000
ROI = 15.7%
a-2)
Printer Division is producing higher ROI
b)
Copier Division
As its ROI is lower than the Expected ROI from additional investment
c)
Fax Division
As its differnetial decline in ROI would be 6.2% which is lowest among all
d)
Printer Division
As its Expected ROI is greater among all other
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