The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 22 percent return on invested capital. Wynn’s desired rate of return is 18 percent. The Cranston Division has $7,300,000 of capital invested in operating assets and access to additional funds as needed. The manager is considering a new investment in operating assets that will require a $1,630,000 capital commitment and promises an 20 percent return. RequiredWould it be advantageous for Wynn Manufacturing Corporation if the Cranston Division makes the investment under consideration?What effect would the proposed investment have on the Cranston Division’s return on investment?What effect would the proposed investment have on the Cranston Division’s residual income?Would return on investment or residual income be the better performance measure for the Cranston Division’s manager?

Return on Investment (ROI): It is a financial ratio which represents the proportion of Net Income…

Answered: Would it be advantageous for Wynn…

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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The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 22 percent return on invested capital. Wynn’s desired rate of return is 18 percent. The Cranston Division has $7,300,000 of capital invested in operating assets and access to additional funds as needed. The manager is considering a new investment in operating assets that will require a $1,630,000 capital commitment and promises an 20 percent return.

Required

Would it be advantageous for Wynn Manufacturing Corporation if the Cranston Division makes the investment under consideration?
What effect would the proposed investment have on the Cranston Division’s return on investment?
What effect would the proposed investment have on the Cranston Division’s residual income?
Would return on investment or residual income be the better performance measure for the Cranston Division’s manager?

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