The Westem Division of Claremont Company had net operating income of $138,000 an

Question

The Westem Division of Claremont Company had net operating income of $138,000 and average invested assets of $565,000. Claremont has a required rate of return of 15.00 percent. Western has an opportunity to increase operating income by $44,000 with a $95,000 investment in assets. Compute Western Division's return on investment and residual income currently and if it undertakes the project. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%). Round your Residual Income (Loss) answers to the nearest whole dollar.) urrently: Return on Investment (ROI) Residual Income (Loss) sed Project: Return on Investment (ROI) Residual Income (Loss)

Explanation / Answer

Currently:

Return on Investment = Net Operating Income / Average Invested Assets*100

=$ 138,000 / $ 565,000*100

= 24.42%

Residual Income ( Loss) = Net Operating Income - ( Average Invested Assets * Required Rate of return)

= $138,000 -($ 565,000 * 15%)

= $ 53,250

Hence the correct answer is :

Proposed:

Return on Investment = Net Operating Income / Average Invested Assets*100

=($ 138,000 + $ 44,000) / ($ 565,000 + $ 95,000)*100

= $ 182,000/ $ 660,000*100

= 27.58%

Residual Income ( Loss) = Net Operating Income - ( Average Invested Assets * Required Rate of return)

= $182,000-( $ 660,000* 15%)

= $ 83,000

Hence the correct answer is :

Currently: Return on Investment 24.42% Residual Income ( Loss) 53,250

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