PA10-3 Evaluating Managerial Performance, Proposed Project Impact on Return on Investment, Residual Income [LO 10-4, 10-5]

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

	Division A		Division B		Division C
Sales revenue	$	1,205,000	$	1,300,000	$	1,338,000
Cost of goods sold		745,000		955,000		972,000
Miscellaneous operating expenses		84,000		72,000		73,000
Interest and taxes		68,000		61,000		61,000
Average invested assets		11,760,000		2,870,000		4,717,000

Wescott is considering an expansion project in the upcoming year that will cost $7.3 million and return $664,000 per year. The project would be implemented by only one of the three divisions. Required: 1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.)) 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.) 3. Rank the divisions according to the ROI and residual income of each. 4-a. Compute the return on investment on the proposed expansion project. (Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.)) 4-b. Is this an acceptable project?

	Yes
	No

5. Without any additional calculations, state whether the proposed project would increase or decrease each divisions ROI. 6. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be entered with a minus sign. Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))