Megamart provides the following information on its two investment centers. Investment Center Electronics......... Sporting Goods..... Sales $40,000,000 20,000,000 Income $2,880,000 2,040,000 Average Assets $16,000,000 12,000,000 1. Compute return on investment for each center. Using return on investment, which center is most effi- cient at using assets to generate income? 2. Assume a target income of 12% of average assets. Compute residual income for each center. Which center generated the most residual income? 3. Assume the Electronics center is presented with a new investment opportunity that will yield a 15% return on investment. Should the new investment opportunity be accepted? The target return is 12%.

Megamart provides the following information on its two investment centers. Investment Center Electronics......... Sporting Goods..... Sales $40,000,000 20,000,000 Income $2,880,000 2,040,000 Average Assets $16,000,000 12,000,000 1. Compute return on investment for each center. Using return on investment, which center is most effi- cient at using assets to generate income? 2. Assume a target income of 12% of average assets. Compute residual income for each center. Which center generated the most residual income? 3. Assume the Electronics center is presented with a new investment opportunity that will yield a 15% return on investment. Should the new investment opportunity be accepted? The target return is 12%.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Operating Net Cash Operating Net Cash Year Income Flow Income Flow 1 $32,300 $103,000 $68,000 $165,000 32,300 103,000 52,000 139,000 32,300 103,000 26,000 98,000 4. 32,300 103,000 11,000 67,000 32,300 103,000 4,500 46,000 Total $161,500 $515,000 $161,500 $515,000 Each project requires an investment of $380,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579
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Required information [The following information applies to the questions displayed below.] Megamart provides the following information on its two investment centers. Investment Center Electronics Income $ 3,114,000 2,261,000 Average Assets $ 17,300,000 13,300,000 Sporting goods Sales $ 41,520,000 18,088,000 1. Compute return on investment for each center. Using return on investment, which center is most efficient at using assets to generate income? 2. Assume a target income of 11% of average assets. Compute residual income for each center. Which center generated the most residual income? 3. Assume the Electronics center is presented with a new investment opportunity that will yield a 14% return on investment. Should the new investment opportunity be accepted? The target return is 11%. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Compute return on investment for each center. Using return on investment, which center is most efficient…
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