ROI & Residual Income CSOM Inc, a division of Gopher Corp., has a net operating
ID: 2474334 • Letter: R
Question
ROI & Residual Income
CSOM Inc, a division of Gopher Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. If the manager of the division is evaluated based on ROI, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year? Explain
Gopher’s required rate of return is 15%. Would Gopher company want the manager of the CSOM division to make an investment of $100,000 that would generate additional net operating income of $18,000 per year? Explain.
CSOM Inc, a division of Gopher Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is CSOM division’s residual income?
If the manager of the CSOM division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year? Explain.
Explanation / Answer
CSOM Inc, a division of Gopher Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is CSOM division’s residual income?
Operating Assets $300,000
Required rate of return 15%
Required net income $45,000
Actual Net income $60,000
Residual Income $15,000 ($60,000 - $45,000)
If the manager of the CSOM division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year? Explain.
Operating Assets $100,000
Required rate of return 15%
Required net income $15,000
Expected Net income $18,000
Increase in Residual Income $3,000 ($18,000 - $15,000)
Since there is an increase in residual income, Manger of CSOM Division will be interested in this investment.
CSOM Inc, a division of Gopher Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. If the manager of the division is evaluated based on ROI, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year? Explain Present Proposed Total Net operating Income $60,000 $18,000 $78,000 Average operating Assets $3,00,000 $1,00,000 $4,00,000 ROI 20.00% 18.00% 19.50% Since the ROI will decrease from 20% to 19.50%, she would not be interested in this investment.Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.