Exercise 9-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO9-1, LO9-2]

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

	Division A			Division B			Division C
Sales	$	5,700,000		$	9,700,000		$	8,800,000
Average operating assets	$	1,140,000		$	4,850,000		$	1,760,000
Net operating income	$	273,600		$	853,600		$	180,400
Minimum required rate of return		17.00	%		17.60	%		14.00	%

Required:
1.	Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

margin turnover ROI

dividion A

divition B

divition 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 percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Divition A Divition B Divition C

Average operating assets

required rate of return

required operating income

actual ooperating income

required operatiing income (above)

residual income (loss)

3.	Assume that each division is presented with an investment opportunity that would yield a 19% rate of return.

Divition A

Divition B

Divition C

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

Diviton A

Divition B

Divition C

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

DIvition A

Divition B

Divition C