Wescott Company has three divisions: A, B, and C. The company has a hurdle rate

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 Division A Division B Division C Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets $ 1,275,000 S 996,000 S 986,000 716,000 57,000 45,000 8,992,000 2,118,000 3,485,000 788,000 68,000 52,000 731,000 56,000 45,000 Wescott is considering an expansion project in the upcoming year that will cost $5.4 million and return $488,000 per year. The project would be implemented by only one of the three divisions. Required 1. Compute the ROl for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.)) ROI Division A DIviSIOon B Division

Explanation / Answer

1. Calculate ROI :

2. Residual income :

4a) ROI = 488000*100/5400000 = 9.04%

Division A Division B Division C Net operating income 367000 164000 148000 Average operating assets 8992000 2118000 3485000 ROI 4.08% 7.74% 4.25%

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