Question

Coolbrook Company has the following information available for the past year: Sales revenue Cost of goods sold and operating expenses Net operating income Average invested assets River Division $1,218,000 89B,000 $ 320,000 $1,130,000 Stream Division $1,812,000 1,291,000 $ 521,000 $1,590,000 The company's hurdle rate is 6.26 percent. Required: 1. Calculate return on investment (ROI) and residual income for each division for last year. 2. Recalculate ROI and residual income for the division for each independent situation that follows: a. Operating income increases by 12 percent. b. Operating income decreases by 9 percent c. The company invests $251,000 in each division, an amount that generates $114,000 additional income per division d. Coolbrook changes its hurdle rate to 4.26 percent. Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Reg 2B Req 2c Reg 2D 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%.)) River Division Stream Division RO Residual Income (Loss)

Answer 1

return on investment is the ratio of net income and average invested asset. it measures how efficiently the assets invested are used to generate profits.

Residual income

residual income is calculated at the end of year residual income is the income left after deducting minimum accepted rate of return.

1.ROI = NET INCOME/ AVERAGE INVESTED ASSETS

	River	Stream
net income	$320,000	$521,000
average asset	$1,130,000	$1,590,000
ROI	28.32% [320000/1130000]	32.77% [521000/1590000]
RESIDUAL INCOME
income at Minimum accepted rate	$70,738[$1,130,000*6.26%]	$99,534[$1,590,000*6.26%]
actual operating income	$320,000	$521,000
Residual income	$249,262[$320,000-70,738]	$421,466[$521,000-99,534]

2a.

operating income increases by 12%.

	River	Stream
net income	$358,400[$320,000*1.12]	$583,520[$521,000*1.12]
average asset	$1,130,000	$1,590,000
ROI	31.72% [358,400/1,130,000]	36.70% [583,520/1,590,000]
RESIDUAL INCOME
income at Minimum accepted rate	$70,738[$1,130,000*6.26%]	$99,534[$1,590,000*6.26%]
actual operating income	$358,400	$583,520
Residual income	$287,662[$358,400-70,738]	$483,986[$583,520-99,534]

b.income decrease by 9%

	River	Stream
net income	$291,200[$320,000*91%]	$474,110[$521,000*91%]
average asset	$1,130,000	$1,590,000
ROI	25.77% [291,200/1,130,000]	29.82% [474,110/1,590,000]
RESIDUAL INCOME
income at Minimum accepted rate	$70,738[$1,130,000*6.26%]	$99,534[$1,590,000*6.26%]
actual operating income	$291,200	$474,110
Residual income	$220,462 [$291,200-70,738]	$374,576 [$474,110-99,534]

c.251000$ additional investment generating additional $114000 income

	River	Stream
net income	$434,000[$320,000+$114,000]	$635,000[$521,000+$114,000]
average asset	$1,381,000 [$1,130,000+$251,000]	$1,841,000 [$1,590,000+$251,000]
ROI	31.43% [$434,000/1,381,000]	34.49% [635,000/1,841,000]
RESIDUAL INCOME
income at Minimum accepted rate	$86,450.6[$1,381,000*6.26%]	$115,246.6[$1,841,000*6.26%]
actual operating income	$434,000	$635,000
Residual income	$347,549 [$434,000-86450.6]	$519,753 [$635000-115246.6]

d.

	River	Stream
net income	$320,000	$521,000
average asset	$1,130,000	$1,590,000
ROI	28.32% [320000/1130000]	32.77% [521000/1590000]
RESIDUAL INCOME
income at Minimum accepted rate	$48,138[$1,130,000*4.26%]	$67,734[$1,590,000*4.26%]
actual operating income	$320,000	$521,000
Residual income	$271,862[$320,000-48138]	$453,266[$521,000-67,734]