Question
Rains Nickless Ltd. Of Australia has two divisions that operate in Perth and Darwin. Selected data from last year on the two divisions is presented
Rains Nickless Ltd. Of Australia has two divisions that operate in Perth and | |||||||||||
Darwin. Selected data from last year on the two divisions is presented below. | |||||||||||
Perth | Darwin | ||||||||||
Sales | $9,000 | $20,000 | |||||||||
Operating Income | $630 | $1,300 | |||||||||
Average Operating Assets | $3,000 | $10,000 | |||||||||
Average Total Assets | $4,300 | $12,000 | |||||||||
Required rate of return | 18.0% | 22.0% | |||||||||
Calculate the return on investment (ROA) for each | Perth | Darwin | |||||||||
division | |||||||||||
ROA |
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Calculate the residual income (RI) for both | Perth | Darwin | |||||||||
divisions (6 points) | |||||||||||
RI |
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Both divisions are considering a new line of products to sell to customers. | |||||||||||
Data for the new project is given below. | |||||||||||
Operating income | $195 | ||||||||||
New investment in operating assets | $1,000 | ||||||||||
The general manager of each division will accept the new project using | |||||||||||
ROI if it increases his/her ROI from last year. Similarly, he/she will accept | |||||||||||
the project using RI if it increases his/her RI from last year. (4 points) | |||||||||||
Indicate with YES/NO below whether each manager will accept or reject | |||||||||||
the new project for each decision criteria. | |||||||||||
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Decision | Perth | Darwin |
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ROA |
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RI |
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Criteria | ||||
Perth | Darwin | |||
ROA (current) |
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Required rate of return (current) |
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ROA (new project) |
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