Part A: (4 mks )

The manager of the Lumber division of Woods Inc. has come up with the following data:

Sales $8,700,000

Investment turnover 4.8

Return on sales 2.5 %

Required cost of capital 14 %

Required: What is the residual income?

Part B ( 5 mks )

The manager of the Paper division of Woodlands Inc. has the following historical data:

Investment turnover 4.8

Return on sales 2.5%

Required cost of capital 5%

The managers compensation, in the form of a bonus, is based on maintaining the

ROI at its historical value or higher. There is an opportunity for the corporation to have the Paper division take on an expansion of the operation by investing an additional $5,000,000. This investment is expected to generate an additional income of $400,000.

Required:

Based on the ROI, determine whether or not the project should be accepted. Show all calculations.