Coolbrook Company has the following information available for the past year: River Division...
Question:
Coolbrook Company has the following information available for the past year:
| River Division | Stream Division | |
| Sales Revenue | $1,203,000 | $1,806,000 |
| Cost of goods sold and operating expenses | $888,000 | $1,294,000 |
| Net operating income | $315,000 | $512,000 |
| Average invested assets | $1,130,000 | $1,580,000 |
The company's hurdle rate is 7.76 percent.
Required:
1. Calculate the 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.)
2. Recalculate ROI and residual income for each division for each independent situation that follows:
a. Operating income increases by 10 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
b. Operating income decreases by 11 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
c. The company invests $248,000 in each division, an amount that generates $106,000 additional income per division. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
d. Coolbrook changes its hurdle rate to 5.76 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.)
Return on Investment:
Return on investment (ROI) is a measure that calculates the return over an average amount invested; it's used to compute the profitability of a project. If the cost incurred to finance an average investment is less than the ROI, the project should be accepted; however, a project with an ROI that's lower than the cost of financing the project should be rejected. The cost of financing a project is also called the hurdle rate or the minimum rate of return. The excess of the net operating income over the minimum required return (hurdle rate * average investment) is known as residual income.
Answer and Explanation: 1
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View this answer1. The return on investment (ROI) and residual income for each division for last year is as follows:
- ROI = (Net Operating Income / Average Invested...
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