Question Coolbrook company has the following information avaiable for past year.

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Question Coolbrook company has the following information avaiable for past year. River division Sales Revenue - $1,200,000 Cogs and operating expenses - 897,000 net operating income- 303,000 average invested assets- $1,110,000 Stream division sales revenue- $1,806,000 cogs and operating expenses- 1,290,000 net operating income- $516,000 Averafe invested assets- $1,440,000 The company's hurdle rate is 6.51 percent. ---------------------------------------------------------------------------- The comapny invest $257,000 in each division, an amount that generates $102,000 additional income per division. ROI = Residual income = ------------------------------- Coolbrook changes it hurdle rate to 4.51 percent. ROI= Residual income=

Explanation / Answer

Summarising above data

Particulars River Stream Sales revenue 1200000 1806000 Less: COGS & operating expenses 897000 1290000 Net opearting income - A 303000 516000 Average invested assets 1110000 1440000 Hurdle rate 6.51 % 6.51 % Normal income at 6.51 % - B 72261 93744 Normal income at 4.51 % - E 50061 64944 Return on additional investment - C 102000 102000 Case 1 ) Expected return B+C = D 174261 195744 Residual income = A- D 128739 320256 Case 2) Expected return E +C = F 152061 166944 Residual Income = A- F 150939 349056

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