Exercise 11-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

	Division A			Division B			Division C
Sales	$	6,900,000		$	10,900,000		$	10,000,000
Average operating assets	$	1,725,000		$	5,450,000		$	2,500,000
Net operating income	$	414,000		$	1,090,000		$	325,000
Minimum required rate of return		19.00	%		20.00	%		16.00	%

Required:

1.

Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your answers to 2 decimal places.)

Margin			Turnover	ROI
Division A		%			%
Division B		%			%
Division C		%			%

2.

Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your "Required rate of return" to 2 decimal places.)

Division A

Division B

Division C

Average operating assets

Required rate of return

%

%

%

Required operating income

Actual operating income

Required operating income (above)

Residual income (loss)

3.	Assume that each division is presented with an investment opportunity that would yield a 21% rate of return.

a.

If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

Division A
Division B
Division C

b.

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

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