Coolbrook Company has the following information available for the past year: Cal

Question

Coolbrook Company has the following information available for the past year:

    

    

   

Calculate return on investment (ROI) and residual income for each division for last year. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

     

Recalculate ROI and residual income for each division for each independent situation that follows:

Operating income increases by 10 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

      

Operating income decreases by 11 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

      

The company invests $248,000 in each division, an amount that generates $106,000 additional income per division. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

      

Coolbrook changes its hurdle rate to 5.76 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)

Coolbrook Company has the following information available for the past year:

Explanation / Answer

Formulas

ROI              = Net operating income / Average operating assets

Residual income = Net operating income - ( Average operating assets* hurdle rate)

(1)

ROI = 315,000/ 1130,000 = 27.88%

Residual income = 315,000 - (1130,000 *7.76%)

(2) when operating income increase by 10%

river division = $312,000 @110% = $346,500

Stream division = $512,000 @110% = $389,392

(3) Oprating income decrease by 11%

River - 315,000 @89%   = $280,350

Stream = 512,000 @89% = $455,680

River division Stream division ROI 27.88% 32.40% Residual income $227,312 $3,89,932

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