There are two different restaurant chains that you have identified as potential
ID: 2348906 • Letter: T
Question
There are two different restaurant chains that you have identified as potential investment opportunities. You are looking ofr a minimum required rate of return of 8% per year. As a starting point, you have the following information:Restaurant X Restaurant Y
Sales $10,000,000 $6,000,000
Net Operating Income 200,000 300,000
Average Operating Assets 2,000,000 3,000,000
a) Calculate the ROI for each restaurant
b) Calculate the residual income for each restaurant
Indicate which investment opportunity you would choose and why.
Explanation / Answer
Resturant X Resturant Y Average Operating Assets 2,000,000 3,000,000 Net Operating Income 200,000 300,000 ROI (Net operating Income / Net operating Assets) 10.00% 10.00% Expected Minimum return at 8% (Average Operating Assets x Minimum required rate of return) 160,000 240,000 Residual Income (Net operating Income - Expected minimum return) 40,000 60,000