Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows: Division A
Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:
| Division A | Division B | Division C | |
|---|---|---|---|
| Sales revenue | $ 1,275,000 | $ 996,000 | $ 986,000 |
| Cost of goods sold | 788,000 | 731,000 | 716,000 |
| Miscellaneous operating expenses | 68,000 | 56,000 | 57,000 |
| Interest and taxes | 52,000 | 45,000 | 45,000 |
| Average invested assets | 8,992,000 | 2,118,000 | 3,485,000 |
Wescott is considering an expansion project in the upcoming year that will cost $5.4 million and return $488,000 per year. The project would be implemented by only one of the three divisions.
Required:
1. Compute the ROI for each division.
2. Compute the residual income for each division.
3. Rank the divisions according to the ROI and residual income of each.
4-a. Compute the
4-b. Is this an acceptable project?
5. Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI.
6. Compute the new ROI and residual income for each division if the project was implemented within that division.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
