Exercise $10-12($Algo$)$ Evaluating New Investments Using Return on Investment $($ROI$)$ and Residual Income $[$LO$10-1,$ LO$10-2]$

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

Division A Division B Division C

Sales $ $12,150,000$ $ $14,175,000$ $ $25,312,500$

Average operating assets $ $3,037,500$ $ $7,087,500$ $ $5,062,500$

Net operating income $ $607,500$ $ $567,000$ $ $810,000$

Minimum required rate of return $14\%10\%16\%$

Required:

$1.$ Compute the return on investment $($ROI$)$ for each division using the formula stated in terms of margin and turnover.

$2.$ Compute the residual income $($loss$)$ for each division.

$3.$ Assume that each division is presented with an investment opportunity that would yield a $15\%$ rate of return.

a$.$ If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

b$.$ If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?