11.01 - Need help answering the incorrect answers: B & C for each problems and the ROI on the Turbocharger.
Return on Investment for Multiple Investments, Residual Income The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $28.9 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows: Air Conditioner Turbocharger Outlay $750,000 $540,000 Operating income 90,000 82,080 Required: 1. Compute the ROI for each investment project. Round to the nearest whole percent. Air conditioner, ROI 12 % 21 x % Turbocharger, ROI 2. Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places. a. The air conditioner investment is made. b. The turbocharger investment is made. 14.92 % 15.11 x % 15.04 x % 15.00 % c. Both investments are made. d. Neither additional investment is made. 3. Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose? The manager will choose the turbocharger, but not the air conditioner. 4. Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 14%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. $ 274,000 b. The turbocharger investment is made. 327,480 x c. Both investments are made. $ 312,480 x d. Neither additional investment is made. 289,000 4. Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 14%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. b. The turbocharger investment is made. $ $ $ $ 274,000 327,480 x 312,480 x 289,000 c. Both investments are made. d. Neither additional investment is made. Which option will the manager choose based on residual income? The turbocharger 5. Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 10%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. $ 1,460,000 b. The turbocharger investment is made. c. Both investments are made. $ $ $ 1,505,080 x 1,520,080 x 1,445,000 d. Neither additional investment is made. Based on residual income, which is the most profitable? Both investments Feedback Check My Work 1 & 2. Operating Income ROI = Average Operating Assets 3. ROI measures a company's ability to generate income relative to its investment in assets. The greater the ROI, the more efficiently the company is using assets to produce income. 4. Residual Income = Operating Income - (Minimum Rate of Return x Average Operating Assets) The higher residual income would be more appealing. 5. Residual Income = Operating Income - (Minimum Rate of Return x Average Operating Assets) Consider the minimum required ROI, profitability and highest residual income to be earned. Return on Investment for Multiple Investments, Residual Income The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $28.9 million and expectec operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows: Air Conditioner Turbocharger Outlay $750,000 $540,000 Operating income 90,000 82,080 Required: 1. Compute the ROI for each investment project. Round to the nearest whole percent. Air conditioner, ROI 12 % Turbocharger, ROI 21 x % 2. Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places. a. The air conditioner investment is made. 14.92 % b. The turbocharger investment is made. 15.11 X % c. Both investments are made. 15.04 X % d. Neither additional investment is made. 15.00 % 3. Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose? 3. Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose? The manager will choose the turbocharger, but not the air conditioner. 4. Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 14%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. 274,000 b. The turbocharger Investment is made. 327,480 c. Both investments are made. 312,480 d. Neither additional investment is made. 289,000 Which option will the manager choose based on residual income? The turbocharger 5. Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 10%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. 1,460,000 b. The turbocharger investment is made. 1,505,080 c. Both investments are made. 1,520,080 x d. Neither additional investment is made. 1,445,000 Based on residual income, which is the most profitable? Both Investments
