Chapters 10-12 Test- 1. Superior Division of the Monroe Company has an opportuni

Question

Chapters 10-12 Test- 1. Superior Division of the Monroe Company has an opportunity to invest in a new project. The project will yield an incremental operating income of $73,350 on average invested assets of $900,000. Superior Division currently has operating income of $425,000 on average invested assets of $4,325,000. Monroe Company has a 7% hurdle rate for new projects. a. What is Superior Division's ROI before making an investment in the project? b. What is Superior Division's residual income before making an investment in the project? c. What is Superior Division's ROl after making the investment in the project? d. What is Superior Division's residual income after making the investment in the project?

Explanation / Answer

a ROI = Operating income/Average invested assets = 425000/4325000= 9.83% b Residual income = Operating income-Minimum return = 425000-(4325000*7%)= 122250 c ROI = Operating income/Average invested assets =(425000+73350)/(4325000+900000)= 9.54% d Residual income = Operating income-Minimum return =(425000+73350)-(4325000+900000)*7%= 132600

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