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Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three
Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows: Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets Division A $ 1,210,000 Division B $ 1,281,000 Division C $ 1,316,000 748,000 83,000 67,000 11,587,000 941,000 71,000 60,000 2,823,000 956,000 72,000 60,000 4,640,000 Wescott is considering an expansion project in the upcoming year that will cost $7.2 million and return $653,000 per year. The project would be implemented by only one of the three divisions. Required: 1. Compute the ROI for each division. 2. Compute the residual income for each division. 3. Rank the divisions according to the ROI and residual income of each. 4-a. Compute the return on investment on the proposed expansion project. 4-b. Is this an acceptable project? 5. Without any additional calculations, state whether the proposed project would increase or decrease each division's ROI. 6. Compute the new ROI and residual income for each division if the project was implemented within that division. Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4A Req 4B Req 5 Req 6 Compute the residual income for each division. Note: Loss amounts should be indicated by a minus sign. Enter your answers in whole dollars not in millions. Residual income Division A Division B Division C (Loss) < Req 1 Req 3 >
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Step: 1
To calculate the residual income for each division we use the formula Residual Income Operating Inco...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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