OI and Residual Income:Basic Computations Watkins Associated Industries is a hig

Question

OI and Residual Income:Basic Computations

Watkins Associated Industries is a highly diversified company with three divisions: Trucking, Seafood, and Construction. Assume that the company uses return on investment and residual income as two of the evaluation tools for division managers. The company has a minimum desired rate of return on investment of 10 percent with a 30 percent tax rate. Selected operating data for three divisions of the company follow.

(a) Compute the return on investment for each division. (Round answers to three decimal places.)
Trucking ROI = Answer

Seafood ROI = Answer

Construction ROI = Answer

(b) Compute the residual income for each division.

QUESTION 2

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ROI and Residual Income:
Impact of a New Investment
The Mustang Division of Detroit Motors had an operating income of $700,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent.

(a) Compute the return on investment. (Round your answer to three decimal places.)
Answer

(b) Compute the residual income.
$Answer

(c) The Mustang Division has an opportunity to increase operating income by $200,000 with an $950,000 investment in assets.

1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your answer to three decimal places.)
Answer

2. Compute the Mustang Division's residual income if the project is undertaken.
$Answer

QUESTION 3

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1.00 points out of 2.00

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NPV and IRR: Unequal Annual Net Cash Inflows
Assume that Goodrich Petroleum Corporation is evaluating a capital expenditure proposal that has the following predicted cash flows:

a. Using a discount rate of 10 percent, determine the net present value of the investment proposal.
$Answer

(Round answer to the nearest whole number.)

b. Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.)
Round to the nearest percent. (Example: 0.15268 = 15%)
Answer

%

Trucking Division Seafood Division Construction Division Sales $1,000,000 $690,000 $900,000 Operating assets 500,000 230,000 380,000 Net operating income 99,000 58,000 57,000

Explanation / Answer

Answer to Question 1:

Answer a.

Trucking Division:

Margin = Net Operating Income / Sales
Margin = $99,000 / $1,000,000
Margin = 9.90%

Turnover = Sales / Operating Assets
Turnover = $1,000,000 / $500,000
Turnover = 2

ROI = Margin * Turnover
ROI = 9.90% * 2
ROI = 19.80%

Seafood Division:

Margin = Net Operating Income / Sales
Margin = $58,000 / $690,000
Margin = 8.41%

Turnover = Sales / Operating Assets
Turnover = $690,000 / $230,000
Turnover = 3

ROI = Margin * Turnover
ROI = 8.41% * 3
ROI = 25.23%

Construction Division:

Margin = Net Operating Income / Sales
Margin = $57,000 / $900,000
Margin = 6.33%

Turnover = Sales / Operating Assets
Turnover = $900,000 / $380,000
Turnover = 2.37

ROI = Margin * Turnover
ROI = 6.33% * 2.37
ROI = 15.00%

Answer b.

Trucking Division:

Minimum Level = Required Rate of Return * Operating Assets
Minimum Level = 10% * $500,000
Minimum Level = $50,000

Residual Income = Net Operating Income - Minimum Level
Residual Income = $99,000 - $50,000
Residual Income = $49,000

Seafood Division:

Minimum Level = Required Rate of Return * Operating Assets
Minimum Level = 10% * $230,000
Minimum Level = $23,000

Residual Income = Net Operating Income - Minimum Level
Residual Income = $58,000 - $23,000
Residual Income = $35,000

Construction Division:

Minimum Level = Required Rate of Return * Operating Assets
Minimum Level = 10% * $380,000
Minimum Level = $38,000

Residual Income = Net Operating Income - Minimum Level
Residual Income = $57,000 - $38,000
Residual Income = $19,000

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