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What is the residual income for each division

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Reference no: EM132523967

Selected sales and operating data for three divisions of a company are provided below:

                                            Red Division                               Blue Division                          Green Division

Sales                                   $6,000,000                      $10,000,000                          $8,000,000

Average Operating Assets            $1,500,000                    $5,000,000                            $2,000,000

Net Operating Income                      $300,000                   $900,000                              $180,000

Minimum Required Rate of Return            15%                           18%                                  12%

Question 1: What is the ROI of each division?

Question 2: What is the residual income for each division?

Question 3: Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%.

a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why?

b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why?

Reference no: EM132523967

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