ROI and Residual Income: Impact of a New Investment

The Stallion Division of Motortown Motors had an operating income of $675,000 and net assets of $2,700,000. Motortown Motors has a target rate of return of 23 percent.

Required

a. Compute the return on investment.

b. Compute the residual income.

c. The Stallion Division has an opportunity to increase operating income by $100,000 with an $675,000 investment in assets.

1. Compute the Stallion Division's return on investment if the project is undertaken. (Round your answer to three decimal places.)

2. Compute the Stallion Division's residual income if the project is undertaken.