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# Return on investment components

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1.
Return On Investment measurement issues.. Green Company has prepared the following information for three of its divisions:

Divison Historical Costs of Investments Division Oprtng Income
X \$560,000 \$66,500
Y \$532,000 \$64,400
Z \$350,000 \$43,120

A. Compute each division's return on investment and residual income, assuming a 10% cost of capital
B. Suppose the net book value of each division's investments is half of the historical cost. Using net book value as the measure of investment, compute each division's return on investment and residual income, assuming a 10% cost of capital.
C. Comment on the division rankings in (a) and (b).
D. If the division managers are rewarded on the basis of return on investment or residual income, will they find it attractive to invest in new, more costly equipment

2. Return on investment components - Alpha company would like to examine the sales margin and asset turnover components of return on investment for three of its divisions and has accordingly prepared the following information:

Divison Investments Div Operating Income Sales
E \$575,000 \$75,000 \$500,000
F \$700,000 \$91,000 \$542,000
G \$1,000,000 \$176,000 \$763,000

A. Compute each division's return on investment, sales margin, and asset turnover.
B. Comment on the division's relative rankings on the rations computed in (a).

#### Solution Preview

1.
Return On Investment measurement issues.. Green Company has prepared the following information for three of its divisions:

Divison Historical Costs of Investments Division Oprtng Income
X \$560,000 \$66,500
Y \$532,000 \$64,400
Z \$350,000 \$43,120

A. Compute each division's return on investment and residual income, assuming a ...

#### Solution Summary

Response gives the steps to compute return on investment components

\$2.19