Financial data for Redstone Company for last year appear below:

Redstone Company

Income Statement

Last year

Sales$1,222,000

Less: operating expenses 1,099,800

Net Operating Income122,200

Less interest and taxes:

Interest expense$60,000

Income tax expense 20,00080,000

Net Income $42,200

Average operating assets are $470,000.

Required:

1.Compute the company's margin, turnover, and return on investment for last year.

2.The Board of Directors of Redstone Company have set a minimum required return of 15%.What was the company's residual income last year?

Need help wtih #3i , #3ii

3.An investment opportunity is available to Redstone Company that would require an investment of

$100,000 in new operating assets and earn earnings before interest and taxes of $25,000.

i.Would the management of Redstone Company likely accept the investment opportunity if evaluated based on return on investment? Explain and show calculations.

ii.Would the management of Redstone Company likely accept the investment opportunity if evaluated based on residual income? Show calculation and explain.

Additional Information

1.Margin = Net Operating Income = 1,099,800 = $ 0.9%

Sales1,222,000

Turnover = Sales=1,099,800=2.34

Average Operating Assets470,000

ROI =Margin x Turnover = 0.9% x 2.34 = 2.1%

2.Residual income = Net Operating Income - (Required Return x Cost of Operating expenses)

= 1,099,800 - (0.15 x 1,222,000)

= 1,099,800 - 183,300

= $916,500