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Exercise 9-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO9-1, LO9-2]

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

	Division A			Division B			Division C
Sales	$	6,700,000		$	10,700,000		$	9,800,000
Average operating assets	$	1,340,000		$	5,350,000		$	1,960,000
Net operating income	$	388,600		$	1,048,600		$	298,900
Minimum required rate of return		22.00	%		19.60	%		19.00	%

	Margin		Turnover	ROI
Division A		%			%
Division B		%			%
Division C		%			%

2.	Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your Required Rate of Return percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

	Division A		Division B		Division C
Average operating assets
Required rate of return		%		%		%
Required operating income
Actual operating income
Required operating income (above)
Residual income (loss)

3.	Assume that each division is presented with an investment opportunity that would yield a 24% rate of return.

a.

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

Division A
Division B
Division C

b.

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

Division A
Division B
Division C