Explore BrainMass

Explore BrainMass

    ROI and residual income

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    The overall sales and operating data for two different companies are given below:

    Company A Company B

    Sales $ 6,000,000 $ 8,000,000
    Average Operating Assets $ 1,500,000 $ 2,000,000
    Net Operating Profit $ 400,000 $ 200,000
    Stockholders' Equity $ 1,000,000 $ 1,500,000
    Each firm's minimum rate of return 14 % 12 %
    (or Their Respective Cost of Capital)

    REQUIRED:

    a) Compute the overall ROI for each company.
    b) Compute the overall Residual Income for each company.
    c) Assume that Company A is presented with an investment opportunity that would require an initial investment in additional operating assets of $100,000 and would yield a ROI and an Internal Rate of Return of 15 %:
    --If performance is being measured by ROI would Company A be likely to accept the opportunity? Reject? Why?
    --If performance is being measured by residual income, would Company A be likely to accept the opportunity? Reject? Why?
    d) Assume that Company B is presented with an investment opportunity that would require an initial investment in additional operating assets of $100,000 and would yield a ROI and an Internal Rate of Return of 15 %:
    --If performance is being measured by ROI would Company B be likely to accept the opportunity? Reject? Why?
    --If performance is being measured by residual income, would Company B be likely to accept the opportunity? Reject? Why?

    © BrainMass Inc. brainmass.com June 3, 2020, 10:11 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/roi-and-residual-income-219964

    Solution Preview

    See attached file.

    The overall sales and operating data for two different companies are given below:

    Company A Company B Total

    Sales $6,000,000 $8,000,000 $14,000,000
    Average Operating Assets $1,500,000 $2,000,000 $3,500,000
    Net Operating Profit $400,000 $200,000 $600,000
    Stockholders' Equity $1,000,000 $1,500,000 $2,500,000
    Each firm's minimum rate of return 14 % 12 %
    (or Their Respective Cost of Capital)

    REQUIRED:

    a) Compute the overall ROI for ...

    Solution Summary

    This provides the steps to calculate the ROI and residual income

    $2.19

    ADVERTISEMENT