Megamart, a retailer of consumer goods, provides the following information on tw
ID: 2438168 • Letter: M
Question
Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).
1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?
2. Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?
3. Assume the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted?
Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?
Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?
Assume the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted?
Investment Center Sales Income AverageInvested Assets Electronics $ 34,200,000 $ 2,907,000 $ 17,100,000 Sporting goods 16,768,000 2,096,000 13,100,000
1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?
2. Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?
3. Assume the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted?
Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?
Return on Investment Choose Numerator: / Choose Denominator: = Return on Investment / = Return on Investment Electronics / = Sporting Goods / = Which department is most efficient at using assets to generate returns for the company?Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?
Investment Center Electronics Sporting Goods Net income Target net income Residual income Which department is most efficient at using assets to generate returns for the company?Assume the Electronics department is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted?
Should the new investment opportunity be accepted?Explanation / Answer
Hey,
Part 1 :
Return on investment is calculated by this formula :
= Net Profit/Investment * 100
Part 2 :
Target Net income = Average Investment * 12%
Part 3 :
Current Return on investment we are having on the electronics department is 17% and we are having an opportunity to earn a 14% return by making the new investment. Prima facie we can say we can't accept the investment opportunity as 14% is less than 17%. But if we imagine that we can't earn 17% by increasing our existing facility then having a 2nd best option is better. Imagine the normal bank deposit rate is 10 % then having 14 % is better than earning 10 %. So this decision is depending on the other factors, Prima Facie we shall not accept it.
Hope this made sense, and help you understand the concept.
Return on Investment Choose Numerator: / Choose Denominator: = Return on Investment Income / Investment = Return on Investment Electronics 2907000 / 17100000 = 17 Sporting Goods 2096000 / 13100000 = 16 Which department is most efficient at using assets to generate returns for the company? Electronics