Wescott Company has three divisions: A; B, and C. The company has a hurdle rate
ID: 2469013 • Letter: W
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. Required: 1. Compute the ROI for each division. (Do not round your intermediate calculations.) 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.) 3. Rank the divisions according to the ROI and residual income of each. 4-a. Compute the return on the proposed expansion project. Return on Proposed Expansion Project %Explanation / Answer
Assuming the ROI & residual incomes are calculated without considering the new expansion for any division. Amt in $ Westcott Company Details 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 Expenses 64,000 52,000 53,100 Interest & Taxes 48,000 41,000 41,500 a Net Income 367,000 152,000 151,400 b Average Invested Assets 8,300,000 1,930,000 3,215,000 1 c ROI =a/b= 4.42% 7.88% 4.71% d Hurdle Rate 8% 8% 8% e Minimum Required Return =b*8%= 664,000 154,400 257,200 2 f Residual Income =a-e= (297,000) (2,400) (105,800) 3 Ranking in ROI & Residual Income Rank Div A 3 Div B 1 Div C 2 4 Investment in Proposed expansion 5,000,000 Return on proposed investment 450,000 Return on proposed investment %= 9.00%
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