Coolbrook Company has the following information available for the past year: Cal
ID: 2448928 • Letter: C
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
Return on investment = net operating income / average invested assets
ROI (River division) = 315000/1130000
= 27.88%
ROI (Steam division) = 512000/1,580,000
= 32.41%
Residual income = Net operating income – (average invested asset x hurdle rate)
Residual income (River Division) = 315,000 – (1,130,000 x 7.76%)
= 227,312
Residual income (Team Division) = 512,000 – (1,580,000 x 7.76%)
= 389,392
2a)
Return on investment = net operating income / average invested assets
ROI (River division) = 315000x (1+0.10)/1130000
= 30.66%
ROI (Steam division) = 512000x (1+ 0.10)/1,580,000
= 35.65%
Residual income = Net operating income – (average invested asset x hurdle rate)
Residual income (River Division) = 315,000x (1+0.10) – (1,130,000 x 7.76%)
= 258,812
Residual income (Team Division) = 512,000x (1+0.10) – (1,580,000 x 7.76%)
= 440,592
2b)
Return on investment = net operating income / average invested assets
ROI (River division) = 315000x (1-0.11)/1130000
= 24.81%
ROI (Steam division) = 512000x (1- 0.11)/1,580,000
= 28.84
Residual income = Net operating income – (average invested asset x hurdle rate)
Residual income (River Division) = 315,000x (1-0.11) – (1,130,000 x 7.76%)
= 192,662
Residual income (Team Division) = 512,000x (1-0.11) – (1,580,000 x 7.76%)
= 333,072
2c)
Return on investment = net operating income / average invested assets
ROI (River division) = (315000+106,000)/(1130000 +248000)
= 421000/1378000
= 30.55%
ROI (Steam division) = (512000+106000)/(1,580,000+248000)
= 618,000/ 1828000
=33.81%
Residual income = Net operating income – (average invested asset x hurdle rate)
Residual income (River Division) = 421000– (1378000x 7.76%)
= 314,067.20
Residual income (Team Division) = 618,000– (1828000x 7.76%)
= 476,147.20