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Violet Company has the following financial data: Sales = $520,000 Net Operating Income = $310,000 Average Invested Assets = $940,000 Hurdle Rate = 12% Calculate Violet's return on investment and its residual income. SOLUTION: Return on Investment (ROI) = Net Operating Income/Average Invested Assets = $310,000/$940,000 = 32.98% Residual Income (Loss) = Operating Income - (Average Invested Assets X Hurdle Rate) = $310,000 - ($940,000 X 10%) = $310,000 - $94,000 = $216,000

Augusta Corp's Golf Division has the following financial data: Sales Revenue = $200,000 Cost of Goods Sold = $105,000 Operating Expenses = $35,000 Average Invested Assets = $900,000 Hurdle Rate = 12% Calculate the Golf Division's return on investment and its residual income: SOLUTION: Net Operating Income = Sales Revenue - Cost of Goods Sold - Operating Expenses = $200,000 - $105,000 - $35,000 = $60,000 Return on Investment (ROI) = Net Operating Income / Average Invested Assets = $60,000 / %90,000 = 6.7% Residual Income (Loss) = Net Operating INcome - (Average Invested Assets X Hurdle Rate) = $60,000 - ($900,000 X 12%) = $60,000 - $108,000 = $(48,000)

Coolbrook Company has the following financial data: River Division Stream Division Sales Revenue $1,200,000 $1,800,000 COGS and operating expenses (900,000) (1,300,000) Net operating Income $300,000 $500,000 Average Invested Assets $1,200,000 $1,800,000 The company's hurdle rate is 6%. SOLUTION: ROI = Net Operating Division / Average Invested Assets Residual Income (Loss) = Net Operating Income - (Average Invested Assets X Hurdle Rate) 1.) Calculate the Return on Investment (ROI) and residual income for each division last year: River Division ROI = $300,000 / $1,200,000 = 25.00% Residual Income = $300,000 - ($1,200,000 X 6%) = $228,000 Stream Division ROI = $500,000 / $1,800,000 = 27.80% Residual Income = $500,000 - ($1,800,000 X 6%) = $392,000 2.) Calculate ROI and residual income for each division for the independent situation where operating income increases by 10%: River Division ROI = ($300,000 X 110%) / $1,200,000 = 27.50% Residual Income = $330,000 - ($1,200,000 X 6%) = $258,000 Stream Division ROI = ($500,000 X 110%) / $1,800,000 = 30.56% Residual Income = $550,000 - ($1,800,000 X 6%) = $442,000 3.) Caulculate ROI and residual income for each division for the independent situation where operating income decreases by 10%: River Division ROI = ($300,000 X 90%) / $1,200,000 = 22.50% Residual Income = $270,000 - ($1,200,000 X 6%) = $198,000 Stream Division ROI = ($500,000 X 90%) / $1,800,000 = 22.50% Residual Income (Loss) = $450,000 - ($1,800,000 X 6%) = $342,000 4.) Calculate ROI and residual income for each division for the independent situation that follows: The company invests $250,000 in each division, an amount that generates $100,000 additional income per division: River Division ROI = ($300,000 + $100,000) / ($1,200,000 + $250,000) = 27.59% Residual Income = $400,000- ($1,450,000 X 6%) = $313,000 Stream Division ROI = ($500,000 + $100,000) / ($1,800,000 + $250,000) = 29.27% Residual Income = $600,000 - ($2,050,000 X 6%) = $477,000 5.) Calculate ROI and residual income for each division for the independent situation where Colbrook changes its hurdle rate to 10%. NO EFFECT on return on investment since it does not incorporate the hurdle rate. River Division Residual Income = $300,000 - ($1,200,000 X 10%) = $180,000 Stream Division Residual Income = $500,000 - ($1,800,000 X 10%) = $320,000

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8%. Selected operating data for the three divisions are as follows: Division A Division B Division C Sales Revenue $1,255,000 $920,000 $898,000 Cost of Goods Sold 776,000 675,000 652,000 Miscellaneous Operating Expenses 64,000 52,000 53,100 Interest and Taxes 48,000 41,000 41,500 Average Invested Assets 8,300,000 1,930,000 3,215,000 SOLUTION: 1.) Compute ROI for each division: Division A ROI = $415,000 / $8,300,000 = 5% Division B ROI = $193,000 / $1,930,000 = 10% Division C ROI = $192,900 / $3,21,000 = 6% 2.) Compute the Residual Income for each division: Division A RI Division A = $415,000 - ($8,300,000 X 8%) = $(249,000) Division B RI Division B = $93,000 - ($1,90,000 X 8%) = $38,600 Division C RI Division C = $192,900 - ($3,215,000 X 8%) = $(64,300) 3.) Rank the divisions according to the ROI and residual income of each (best to worst): Division B, Division C, Division A 4.) Compute the Return on Investment on the proposed expansion project: Compute the return on investment on the proposed expansion project: $450,000 / $5,000,000 = 9% Yes, this is an acceptable project. The project generates a 9% return which is above the company's given hurdle rate of 8%. 5.) State whether the proposed project would increase or decrease each division's ROI: Division A - Increase Division B - Decrease Division C - Increase Both Division A and Division C would accept this project because its ROI is greater than either divisions current ROI. Therefore, the project would increase the ROI for either A or C. However, DIvision B currently has an ROI of 10% so the project would actually decrease the divisions ROI if accepted. Even though the project exceeds Wescott's hurdle rate. Division B would prefer to reject the project. 6.) Compute the new ROI and residual income for each division if the project was implemented within that division: ROI Residual Income (Loss) Division A 6.50% $(199,000) Division B 9.28% $88,600 Division C 7.83% $(14,300) ROI Division A = ($415,000 + 450,000) / ($8,300,000 + $5,000,000) = 6.50% RI Division A = ($415,000 + $450,000) - (($8,300,000 + $5,000,000) X 8%) = $(199,000) ROI Division B = ($193,000 + $450,000) / ($1,930,000 + $5,000,000) = 9.28% RI DIvision B = ($193,000 + $450,000) - (($1,930,000 + $5,000,000) X 8%) = $88,600 ROI Division C = ($192,900 + $450,000) / ($3,215,000 + $5,000,000) = 7.83% RI Division C = ($192,900 + $450,000) - (($3,215,000 + $5,000,000) X 8%) = $(14,300)

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