Required: 1. Calculate the current ROI and the expected return on the proposed investment. 2. Calculate the
Question:
Required: 1. Calculate the current ROI and the expected return on the proposed investment.
2. Calculate the gaming division's current residual income and the expected residual income on the proposed investment. (Assume that the division's minimum accepted rate of return is 17 percent.)
3. Should the new machines be purchased:
a. If the division uses the ROI method?
b. If the division uses the residual income method?
The manager of the manufacturing division of Minolta Company is evaluated on a ROI and Residual residual income basis. He is in the process of evaluating three investment proposals. Income
\begin{tabular}{|c|c|c|c|c|}
\hline & \begin{tabular}{c}
Division \\
$W$
\end{tabular} & \begin{tabular}{c}
Division \\
$x$
\end{tabular} & \begin{tabular}{c}
Division \\
$Y$
\end{tabular} & \begin{tabular}{c}
Division \\
$z$
\end{tabular} \\
\hline . . . . . . . . . . . . . . & $\$ 100,000$ & $\$ 300,000$ & $\$(i)$ & $\$ 850,000$ \\
\hline Net income . . . . . . . . . . . . . . . . . . . & $S$
(a) & $\$ 90,000$ & $\$(j)$ & $S(m)$ \\
\hline Total assets. . . . . . . . . . . . . . . . . . . & $\$ 85,000$ & $\$(e)$ & $\$ 550,000$ & $S(n)$ \\
\hline Operating performance ratio . . . . . . . & $15 \%$ &
(f) & $6 \%$ & (0) \\
\hline Asset turnover ratio. . . . . . . . . . . . . . &
(b) & 0.75 times & (k) & 4.0 times \\
\hline ROI &
(c) & (g) & (1) & $21 \%$ \\
\hline Minimum accepted rate of return . . . & $13 \%$ & (h) & $15 \%$ & $12 \%$ \\
\hline Residual income . . . . . . . . . . . . . . . . . & $\$(d)$ & \$ 12,000 & $\$ 17,500$ & $\$(p)$ \\
\hline
\end{tabular}
Compute the missing data, labeled
(a) through (p)
The gaming division of Nevada Corporation had income of $\$ 550,000$ and total assets of $\$ 3,000,000$ in 2000 . The figures are expected to be similar in 2001 . The manager of the gaming division has an opportunity to purchase some new gambling machines for $\$ 250,000$. He concludes that the new machines would increase annual net income by $\$ 44,000$
Step by Step Answer:
Survey Of Accounting
ISBN: 9780538846172
1st Edition
Authors: James D. Stice, W. Steve Albrecht, Earl Kay Stice, K. Fred Skousen