Last years results for a division of a multinational company were

Average operating assets $700,000

Operating profit 150,000

Sales 1,260,000

The required cost of capital for Forest Company is 18%.

Required: Answer the following questions:

1. Compute the residual income for the division.

2. Compute the return on investment for the division.

3. Calculate the profit margin ratio and asset turnover ratio for Oak Division using the original numbers.

4. The division is considering an investment opportunity that would increase operating profit by $90,000 a year for an investment of $450,000. What is the return on investment from this opportunity? What is the residual income of this opportunity? Does the decision to make this investment depend on whether the division is evaluated based on return on investment or on residual income? Explain.

5. Suppose instead that the Division could reduce its investment so that its asset turnover ratio increased by 20% without affecting sales or profits. What would be the new return on investment?