Investment Center 1 Investment Center 2 Operating income $ 50,000 $ 70,000 Asset

Question

Investment Center 1

Investment Center 2

Operating income

$ 50,000

$ 70,000

Assets invested

125,000

180,000

Income taxes

15,000

21,000

Cost of capital in dollars

13,000

25,000

Desired ROI

56%

48%

Calculate ROI, residual income, and EVA for each of the investment centers listed. (Round to two decimal places.)

Investment Center 1

Investment Center 2

Operating income

$ 50,000

$ 70,000

Assets invested

125,000

180,000

Income taxes

15,000

21,000

Cost of capital in dollars

13,000

25,000

Desired ROI

56%

48%

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A: ROI

ROI = Net Income/Assets Invested*100

Net Income = Operating Income - Taxes

Investment Center 1 = (50000 - 15000)/125000*100 = 28%

Investment Center 2 = (70000 - 21000)/180000*100 = 27.22%

-----------

Part B: Residual Income

Residual Income = Operating Income - Desired ROI*Average Assets

Investment Center 1 = (50000) - 56%*125000 = -20000

Investment Center 2 = (70000) - 48%*180000 = -16400

----------------

Part C:

EVA = NOPAT - Cost of Capital in Dollars

Investment Center 1 = (50000 - 15000) - 13000 = 22000

Investment Center 2 = (70000 - 21000) - 25000 = 24000

Thanks.

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