PART 1

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine isnotpurchased?

A. $202,000

B. $1,930,000

C. $2,110,000

D. $1,060,000

PART 2

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is purchased?

A. $2,545,000

B. $1,320,000

C. $2.860,000

D. $4,456,000

PART 3

If a manager is evaluated using the return on investment, the manager may be reluctant to invest in new equipment because the additional investment

A. may reduce profit by the cost of the investment.

B. will decrease the level of assets.

C. may decrease the return on investment.

D. may increase investment turnover.

PART 4

A manager is evaluated based on return on investment. The corporate minimum required return is 11 percent and the manager runs a division that has attained a 14 percent return on investment. Which of the following statements is true?

A. The manager will most likely not invest in a project that has a return on investment of 13 percent.

B. The manager will invest in all projects that increase operating income.

C. The manager will not consider projects that exceed 14 percent.

D. The manager may prefer to invest in projects that have a return on investment that is very close 11 percent to stay in line with corporate expectations.

PART 5

Evaluating segments based on the segment's return on investment will

A. encourage each segment's manager to select only projects that are above the company's current return on investment.

B. encourage each segment's manager to only select projects that are above the individual segment's current return on investment.

C. encourage each segment's manager to select only projects below the company's required rate of return.

D. encourage managers to select only projects below the segment's cost of capital.

PART 6

Economic value added is

A. essentially the same as residual income except that adjustments are made to liabilities and assets to eliminate "accounting distortions" caused by interest expense.

B. essentially the same as residual income except that adjustments are made to income and assets to eliminate "accounting distortions" that arise from following generally accepted accounting principles.

C. the use of qualitative and quantitative measures to evaluate performance.

D. essentially the same as residual income except that adjustments are made to income and assets to eliminate "accounting distortions" caused by noninterest-bearing current liabilities.