| Coolbrook Company has the following information available for the past year: |
| River Division |
Stream Division | |||
| Sales revenue | $ | 1,208,000 | $ | 1,819,000 |
| Cost of goods sold and operating expenses | 892,000 | 1,296,000 | ||
| Net operating income | $ | 316,000 | $ | 523,000 |
| Average invested assets
|
$ | 1,140,000 | $ | 1,460,000 |
Calculate return on investment (ROI) and residual income for each division for last year
4
Operating income increases by 10 percent.
Operating income decreases by 8 percent.
Coolbrook changes its hurdle rate to 5.76 percent.
1
Calculate return on investment (ROI) and residual income for each division for last year
Answer:
| River | Stream | |
| ROI =Net Operating Income / Average Invested Assets |
||
| Net Operating Income | 316000 | 523000 |
| Average Invested Assets | 1140000 | 1460000 |
| ROI | 0.27719298 | 0.35822 |
| 27.72% | 35.82% | |
| residual income =Net Operating Income – (Average Net Operating Income – (Average Invested Assets × Hurdle Rate) |
227536 | 409704 |
2
Operating income increases by 10 percent
Answer:
| River | Stream | |
| ROI =Net Operating Income / Average Invested Assets |
||
| Net Operating Income | 347600 | 575300 |
| Average Invested Assets | 1140000 | 1460000 |
| ROI | 0.30491228 | 0.39404 |
| 30.49% | 39.40% | |
| residual income =Net Operating Income – (Average Net Operating Income – (Average Invested Assets × Hurdle Rate) |
259136 | 462004 |
3
Operating income decreases by 8 percent.
answer:
| River | Stream | |
| ROI =Net Operating Income / Average Invested Assets |
||
| Net Operating Income | 290720 | 481160 |
| Average Invested Assets | 1140000 | 1460000 |
| ROI | 0.25501754 | 0.32956 |
| 25.50% | 32.95% | |
| residual income =Net Operating Income – (Average Net Operating Income – (Average Invested Assets × Hurdle Rate) |
202256 | 367864 |
4
Coolbrook changes its hurdle rate to 5.76 percent
answer:
| River | Stream | |
| ROI =Net Operating Income / Average Invested Assets |
||
| Net Operating Income | 316000 | 523000 |
| Average Invested Assets | 1140000 | 1460000 |
| ROI | 0.27719298 | 0.35822 |
| 27.72% | 35.82% | |
| residual income =Net Operating Income – (Average Net Operating Income – (Average Invested Assets × Hurdle Rate) |
250336 | 438904 |
