Evaluating New Investments Using Return on Investment (ROI) and Residual Income

Three divisions of Watcore Inc. report the following sales and operating data:

Division A Division BDivision C

Sales . . .... . . . . . .. . .. ..$6,000,000$10,000,000$8,000,000

Average operating assets . . .$1,500,000 $5,000,000$2,000,000

Operating income ... .... . . $300,000$900,000$180,000

Minimum required rate of return.15% 18%12%

Required:

1. Compute the return on in vestment (ROI) for each division, using the formula stated in terms of margin and turnover.

2.Compute the residual income for each division.

3. Assume that each division i s presented with an in vestment opportunity that would yield a rate of return of 17%.

a.If performance i s being measured by ROI, which division or divisions will probably accept the opportunity? Reject it? Why?

b.If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject it? Why