Exercise 10-12 (Algo) Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO10-1, LO10-2]

Exercise 10-12 (Algo) Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO10-1, LO10-2] Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Sales Average operating assets Net operating income Minimum required rate of return Division A $ 12,690,000 $ 3,172,500 $ 634,500 14% Division B $ 14,805,000 $ 7,492,500 $ 592,200 10% Division C $ 26,437,500 $ 5,287,500 $ 846,000 16% Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3A Reg 3B Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round your answers to 1 decimal place.) Margin Turnover ROI % Division A Division B Division C % % % % % Reg 1 Req 2 > Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req Req 3B Compute the residual income (loss) for each division. (Do not round intermediate calculations. Loss amounts should be indicated by a minus sign.) Division A Division B Division C Residual income (loss) Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Req Req 3B Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? Division A Division B Division C Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Req Req 3B Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity? Division A Division B Division C