PLEASE ROUND ANSWERS TO 2 DECIMAL PLACES IF APPLICABLE Westerville Company repor

Question

PLEASE ROUND ANSWERS TO 2 DECIMAL PLACES IF APPLICABLE

Westerville Company reported the following results from last year’s operations:

This year, the company has a $200,000 investment opportunity with the following cost and revenue characteristics:

The company’s minimum required rate of return is 10%.

If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

12. What is the residual income of this year’s investment opportunity?

If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

PLEASE ROUND ANSWERS TO 2 DECIMAL PLACES IF APPLICABLE

Westerville Company reported the following results from last year’s operations:

Explanation / Answer

9. The net operating income from the investment opportunity is $ 300,000 x 60% - $ 132,000 = $ 48,000

Total net operating income = $ 300,000 + $ 48,000 = $ 348,000

Total operating assets = $ 1,000,000 + $ 200,000 = $ 1,200,000

Return on Investment ( ROI) = Net operating income / Operating assets = 348,000 / 1,200,000 x100 = 29%

11. Last years Residual Income (RI) = Net operating income - ( Average operating assets x Minimum required rate of return ) = 300,000 - ( 1,000,000 x 10% ) = $ 200,000

12. The RI of this year's investment opportunity = $ 48,000 - ( $ 200,000 x 10% ) = $ 28,000

13. RI = $ 348,000 - ( 1,200,000 x 10%) = $ 228,000

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