Paula Boothe, president of the Sheffield Corporation, has mandated a minimum 9%
ID: 2580617 • Letter: P
Question
Paula Boothe, president of the Sheffield Corporation, has mandated a minimum 9% return on investment for any project undertaken by the company. Given the company’s decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 9%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 14% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,861,000 in a new line of energy drinks that is expected to generate $223,400 in operating income.
a) Calculate the residual income for the proposed new line of energy drinks.
Residual income $____Explanation / Answer
Calculate residual income :
Residual income = Actual net operating income-Minimum operating income
= 223400-(1861000*9%)
Residual income = 55910