8 Comparing return on investment and residual income LO 15-6, 15-7

Cole Corporation operates three investment centers. The following financial statements apply to the investment center named Morrison Division.

MORRISON DIVISION Income Statement For the Year Ended December 31, 2014
Sales revenue	$	106,080
Cost of goods sold		59,875
Gross margin		46,205
Operating expenses
Selling expenses		(2,780	)
Depreciation expense		(4,085	)
Operating income		39,340
Nonoperating item
Loss of sale of land		(3,400	)
Net income	$	35,940

MORRISON DIVISION Balance Sheet As of December 31, 2014

Assets

Cash

$

12,642

Accounts receivable

40,366

Merchandise inventory

36,900

Equipment less accumulated depreciation

90,268

Nonoperating assets

9,900

Total assets

$

190,076

Liabilities

Accounts payable

$

9,527

Notes payable

68,000

Stockholders equity

Common stock

79,000

Retained earnings

33,549

Total liability and stock equity

$

190,076

Required

c.

Calculate the ROI for Morrison. (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

ROI ( ) %

Cole has a desired ROI of 14 percent. Headquarters has $94,000 of funds to assign to its investment centers. The manager of the Morrison Division has an opportunity to invest the funds at an ROI of 16 percent. The other two divisions have investment opportunities that yield only 15 percent.

d.	Calculate the new ROI for Morrison division, if the investment opportunity is adopted by Morrison.(Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

NEW ROI ( ) %

e-1.	Based on the original data calculate the residual income. (Round your answer to the nearest dollar amount.) ORIGINAL RESIDUAL INCOME ( )

e-2.

Calculate the new residual income based on information provided in requirement d. (Round your answer to the nearest dollar amount.) NEW RESIDUAL INCOME ( )

7 Determining the internal rate of return LO 16-3

Merton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the companys cash outflow for operating expenses by $1,290,000 per year. The cost of the equipment is $6,408,255.60. Merton expects it to have a 8-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required
a.	Calculate the internal rate of return of the investment opportunity. INTERNAL RATE OF RETURN ( ) %