PA10-2 Calculating Unknowns, Predicting Relationship among Return on Investment, Residual Income, Hurdle Rates [LO 10-4, 10-5]

The following is partial information for Charleston Companys 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		?			$	600,000
Average invested assets	$	2,500,000				?
Net Operating income	$	160,000			$	150,000
Profit margin		20	%			?
Investment turnover		?				0.16
Return on investment		?				?
Residual income	$	40,000			$	(30,000	)

Required: 1. Without making any calculations, determine whether each divisions return on investment is above or below Charlestons hurdle rate. 2. Determine the missing amounts in the preceding table. (Round your ROI percentage answers to 1 decimal place, (i.e., 0.123 should be entered as 12.3%). Round investment turnover to 2 decimal places.) 3. What is Charlestons hurdle rate? (Round your answer to 1 decimal place, (i.e. 0.123 should be entered as 12.3%.)) 4-a. Suppose Charleston has the opportunity to invest additional assets to help expand the companys market share. The expansion would require an average investment of $2,800,000 and would generate $140,000 in additional income. Calculate the return on investment of the proposed expansion. 4-b. From Charlestons perspective, is this a viable investment?

	Yes
	No

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 manager think about the proposed project?