Coolbrook Company has the following information available for the past year: Cal
ID: 2449489 • 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 8 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
Operating income decreases by 9 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
The company invests $253,000 in each division, an amount that generates $102,000 additional income per division. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
Coolbrook changes its hurdle rate to 5.01 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
Ans 1 River Stream Division Division Sales revenue 1,209,000 1,801,000 Cost of goods sold and operating expenses 886,000 1,283,000 Net operating income 323,000 518,000 Average invested assets 1,170,000 1,580,000 ROI =Net Operating Income/Average Invested Asset 27.61% 32.78% Minumum return @hurdle rate 7.01% 82,017.0 110,758.0 Residual Income =Net operating income-Minimum required income @hurdle rate 240,983.0 407,242.0 2 .a. Net operating income(increase by 8%) 348,840 559,440 Average invested assets 1,170,000 1,580,000 ROI =Net Operating Income/Average Invested Asset 29.82% 35.41% Minumum return @hurdle rate 7.01% 82,017.0 110,758.0 Residual Income =Net operating income-Minimum required income @hurdle rate 266,823.0 448,682.0 2.b. Net operating income(decrease by 9%) 293,930 471,380 Average invested assets 1,170,000 1,580,000 ROI =Net Operating Income/Average Invested Asset 25.12% 29.83% Minumum return @hurdle rate 7.01% 82,017.0 110,758.0 Residual Income =Net operating income-Minimum required income @hurdle rate 211,913.0 360,622.0 2.c. Additional investment 253,000 , additional income 102000 Net operating income 425,000 620,000 Average invested assets 1,423,000 1,833,000 ROI =Net Operating Income/Average Invested Asset 29.87% 33.82% Minumum return @hurdle rate 7.01% 99,752.3 128,493.3 Residual Income =Net operating income-Minimum required income @hurdle rate 325,247.7 491,506.7 2.d. Hurde rate reduced to 5.01% Net operating income 323,000 518,000 Average invested assets 1,170,000 1,580,000 ROI =Net Operating Income/Average Invested Asset 27.61% 32.78% Minumum return @hurdle rate 5.01% 58,617.0 79,158.0 Residual Income =Net operating income-Minimum required income @hurdle rate 264,383.0 438,842.0