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    Evaluating New Investments Using Return on Investment and Residual Income

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    Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO2, LO3]

    Selected sales and operating data for three divisions of three different companies are given below:

    Division A Division B Division C
    Sales $ 6,000,000 $ 10,000,000 $ 8,000,000
    Average operating assets $ 1,500,000 $ 5,000,000 $ 2,000,000
    Net operating income $ 300,000 $ 900,000 $ 180,000
    Minimum required rate of return 15 % 18 % 12 %
    ________________________________________

    Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Omit the "%" sign in your response.)

    ROI
    Division A
    %
    Division B
    %
    Division C
    %
    ________________________________________

    Compute the residual income for each division. (Negative amounts should be indicated by a minus sign. Leave no cells blank, enter "0" as required. Omit the "$" sign in your response.)

    Division A Division B Division C
    Residual income $
    $
    $
    ________________________________________

    Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%.

    (a) If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject?

    Division A
    Division B
    Division C
    ________________________________________

    (b) If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject?

    Division A
    Division B
    Division C

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