Comart, a retailer of consumer goods, provides the following information on two
ID: 2558355 • Letter: C
Question
Comart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).
Compute return on investment for each department. (Do not round your intermediate calculations and round your final answers to the nearest whole percentages. Omit the "%" sign in your response.)
Using return on investment, which department is most efficient at using assets to generate returns for the company?
Assume a target income level of 11.8% of average invested assets. Compute residual income for each department. (Omit the "$" sign in your response.)
Assume the Electronics department is presented with a new investment opportunity that will yield a 14.4% return on assets. (Assume a target income level of 11.8% of average invested assets.) Should the new investment opportunity be accepted?
Comart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).
Explanation / Answer
Answer (1 .1)
Return on Investment = ( Net Income / Average Invested Assets ) * 100
Answer (1.2)
Since return on investment of Electronics department is higher than that of Sporting goods department. Thus Electronics department is most efficient at using assets to generate returns for the company.
Answer (2.1)
Residual income = Net Income - (Average Invested Assets * Target rate)
Answer (2.2)
As per the above calculations , we can conclude that Electronics department has the most residual income for the company.
Answer 3
Accept
Explanation : Even though the proposed new inventment for Electronics department yield a bit less than the existing ROI of electronics department but the yeild is still more than the target ROI or Cost of capital ie 11.8 %. Thus it is recommended to accept the investment opportunity