Landau Company has three divisions, X, Y, and Z. The company has a hurdle rate of 8 percent.
Selected operating data of the three divisions follow:

Landau is considering an expansion project in the upcoming year that will cost \($3,500,000\) and return \($525,000\) 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. Compute the return on the proposed expansion project. Is this an acceptable project to Landau?

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.

Transcribed Image Text:

Sales Cost of goods sold Miscellaneous operating expenses Allocated corporate expenses Average invested assets Division X $ 458,000 316,000 Division Y $ 560,000 313,925 Division Z $ 486,000 233,600 42,000 58,000 72,000 29,000 39,000 35,500 1,600,000 2,110,000 1,315,000