The Plastics Division of Minock Manufacturing currently earns $4.25 million and has divisional assets of $25 million. The divisionmanager is considering the acquisition of a new asset that will add to profit. The Investment has a cost of $5.502,000 and will have ayearly cash flow of $1,467,500. The asset will be depreciated using the straight-line method over a five-year life and is expected tohave no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. Thecompany's cost of capital is 7 percent. Ignore taxes. The division manager leams that there is an option to lease the asset on a year-to-year lease for $1,162,000 per year. All depreciation and other tax benefits would accrue to the lessor.Required:a. What is the division's residual income before considering the project?b. What is the division's residual income if the asset is purchased?c. What is the division's residual income if the asset is leased?Note: For all requirements, enter your answers in dollars, not in millions.a. Residual incomeb. Residual incomec. Residual income

Residual Income :Residual Income is the money that continues to come in after covering all the…

Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual Income if the asset is leased?

Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual Income if the asset is leased?

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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Question

The Plastics Division of Minock Manufacturing currently earns $4.25 million and has divisional assets of $25 million. The division
manager is considering the acquisition of a new asset that will add to profit. The Investment has a cost of $5.502,000 and will have a
yearly cash flow of $1,467,500. The asset will be depreciated using the straight-line method over a five-year life and is expected to
have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The
company's cost of capital is 7 percent. Ignore taxes. The division manager leams that there is an option to lease the asset on a year-to-
year lease for $1,162,000 per year. All depreciation and other tax benefits would accrue to the lessor.
Required:
a. What is the division's residual income before considering the project?
b. What is the division's residual income if the asset is purchased?
c. What is the division's residual income if the asset is leased?
Note: For all requirements, enter your answers in dollars, not in millions.
a. Residual income
b. Residual income
c. Residual income

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Step 2: a) Computation of Divisional residual income before considering the project

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Step 3: b) Computation of Residual income if the asset is purchased :

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Step 4: c) Computation of residual income if the asset is leased

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