Please answers : Round your answer to three decimal places ROI and Residual Inco
ID: 2411406 • Letter: P
Question
Please answers : Round your answer to three decimal places
ROI and Residual Income:
Impact of a New Investment
The Mustang Division of Detroit Motors had an operating income of $700,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent.
(a) Compute the return on investment. (Round your answer to three decimal places.)
Answer
(b) Compute the residual income.
$Answer
(c) The Mustang Division has an opportunity to increase operating income by $200,000 with an $950,000 investment in assets.
1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your answer to three decimal places.)
Answer
2. Compute the Mustang Division's residual income if the project is undertaken.
$Answer
Explanation / Answer
Answer a.
Return on Investment = Operating Income / Net Assets
Return on Investment = $700,000 / $4,000,000
Return on Investment = 17.50%
Answer b.
Residual Income = Operating Income - Rate of Return * Net Assets
Residual Income = $700,000 - 16% * $4,000,000
Residual Income = $60,000
Answer c.
New Operating Income = $700,000 + $200,000
New Operating Income = $900,000
New Net Assets = $4,000,000 + $950,000
New Net Assets = $4,950,000
Return on Investment = Operating Income / Net Assets
Return on Investment = $900,000 / $4,950,000
Return on Investment = 18.18%
Residual Income = Operating Income - Rate of Return * Net Assets
Residual Income = $900,000 - 16% * $4,950,000
Residual Income = $108,000