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LO 10-4, 10-5 PA10-2 Calculating Unknowns, Predicting Relationship among Return on Investment, Residual Income, Hurdle Rates The following is partial information for Charleston Company's most
LO 10-4, 10-5 PA10-2 Calculating Unknowns, Predicting Relationship among Return on Investment, Residual Income, Hurdle Rates The following is partial information for Charleston Company's most recent year of operation. It manufactures lawn mowers and categorizes its operations into two divisions: Bermuda and Midiron. Bermuda Division Midiron Division Sales revenue Average invested assets Net operating income Profit margin Investment turnover Return on investment Residual income ? $2,500,000 $ 160,000 20% ? ? $ 40,000 $600,000 ? $150,000 ? 0.16 ? $ (30,000) Required: 1. Without making any calculations, determine whether each division's return on investment is above or below Charleston's hurdle rate. How can you tell? 2. Determine the missing amounts in the preceding table. 3. What is Charleston's hurdle rate? 4. Suppose Charleston has the opportunity to invest additional assets to help expand the com- pany's market share. The expansion would require an average investment of $2,800,000 and would generate $140,000 in additional income. From Charleston's perspective, is this a viable investment? Why or why not? 5. Suppose the two divisions would equally share the investment and profits from the expansion project. If return on investment is used to evaluate performance, what will each division man- ager think about the proposed project? 6. In requirement 5, will either manager's preference change if residual income is used to measure division performance? Explain your
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