Coolbrook Company has the following information available for the past year: Cal
ID: 2462925 • 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 9 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 $244,000 in each division, an amount that generates $113,000 additional income per division. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
Coolbrook changes its hurdle rate to 4.76 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
1.
Calculate return on investment (ROI) and residual income for each division for last year
Particulars
River Division
Stream Division
Net Operating Income
315,000
532,000
Average Invested Assets
1,060,000
1,460,000
Net Operating Income/ Average Invested Assets
ROI
29.72
36.44
Hurdle Rate
6.76
6.76
Net Operating Income-(Average Invested Assets x Hurdle Rate)
Residual Income
243,344
433,304
2.
Recalculate ROI and residual income for each division for each independent situation that follows:
a.
Operating income increases by 9 percent
Particulars
River Division
Stream Division
Net Operating Income (9% Increase)
343,350
579,880
Average Invested Assets
1,060,000
1,460,000
Net Operating Income/ Average Invested Assets
ROI
32.39
39.72
Hurdle Rate
6.76
6.76
Net Operating Income-(Average Invested Assets x Hurdle Rate)
Residual Income
271,694
481,184
B.
Operating income decreases by 11 percent
Particulars
River Division
Stream Division
Net Operating Income (11% decrease)
280,350
473,480
Average Invested Assets
1,060,000
1,460,000
Net Operating Income/ Average Invested Assets
ROI
26.45
32.43
Hurdle Rate
6.76
6.76
Net Operating Income-(Average Invested Assetsx Hurdle Rate)
Residual Income
208,694
374,784
c.
The company invests $244,000 in each division, an amount that generates $113,000 additional income per division
Particulars
River Division
Stream Division
Net Operating Income ($113,000 increase)
428,000
645,000
Average Invested Assets ($244,000 increase)
1,060,000
1,460,000
Net Operating Income/ Average Invested Assets
ROI
40.38
44.18
Hurdle Rate @ 6.76%
6.76
6.76
Net Operating Income-(Average Invested Assets x Hurdle Rate)
Residual Income
356,344
546,304
d. Cool brook changes its hurdle rate to 4.76 percent.
Particulars
River Division
Stream Division
Net Operating Income
315,000
532,000
Average Invested Assets
1,060,000
1,460,000
Net Operating Income/ Average Invested Assets
ROI
29.72
36.44
Hurdle Rate @ 4.76
4.76
4.76
Net Operating Income-(Average Invested Assets x Hurdle Rate)
Residual Income
264,544
462,504
Particulars
River Division
Stream Division
Net Operating Income
315,000
532,000
Average Invested Assets
1,060,000
1,460,000
Net Operating Income/ Average Invested Assets
ROI
29.72
36.44
Hurdle Rate
6.76
6.76
Net Operating Income-(Average Invested Assets x Hurdle Rate)
Residual Income
243,344
433,304