Problem 12-17

Sarah Jones, the manager of the Teen division of Eve Clothing Company, was evaluating the acquisition of a new embroidery machine. The budgeted operating income of the Teen division was $5,030,000 with total assets of $32,500,000 and noninterest-bearing current liabilities of $1,600,000. The proposed investment would add $1,028,000 to operating income and would require an additional investment of $5,282,000. The targeted rate of return for the Teen division is 13.70 percent. (Ignore taxes in this problem.) ROI is 16.28% and 16.74%. Compute the residual income of the Teen division if the embroidery machine is not purchased.Compute the residual income of the Teen division if the embroidery machine is purchased.