Coolbrook Company has the following information available for the past year: The

Question

Coolbrook Company has the following information available for the past year:   

   
The company’s hurdle rate is 7.01 percent.

Required:
1. Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))



2. Recalculate ROI and residual income for each division for each independent situation that follows: (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

a. Operating income increases by 8 percent.



b. Operating income decreases by 9 percent.



c. The company invests $256,000 in each division, an amount that generates $116,000 additional income per division.



d. Coolbrook changes its hurdle rate to 5.01 percent.

River Division Stream Division Sales revenue $ 1,201,000 $ 1,800,000 Cost of goods sold and operating expenses 894,000 1,289,000 Net operating income $ 307,000 $ 511,000 Average invested assets $ 1,040,000 $ 1,550,000

Explanation / Answer

ROI=net operating income/average invested assets

Residual income=Net operating income - (average invested assets × hurdle rate)

1.

2. A.

2.b

2.c.

($307,000+116,000)/($1,040,000+$256,000)

423,000/1296,000=32.64%

(511,000+116,000)/(1,550,000+256,000)

627,000/1806,000=34.72%

River division Stream division ROI $307,000/$1,040,000=29.52% $511,000/$1,550,000=32.97% Residual income $307,000-(1040,000×7.01%)=$234,096 $511,000-(1,550,000×7.01%)=$402,345

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