Chapter 23, Problem 23.32E

a.

To determine

Return on investment:

Return on investment (ROI) is an accounting measure of income divided by an accounting measure of investment. The formula used to determine ROI is given below:

$\text{Return}\text{on}\text{investment}=\frac{\text{Income}}{\text{Investment}}$

However, ROI can provide more helpful in evaluating the performance when broken into two components as shown below.

$\frac{\text{Income}}{\text{Investment}}=\frac{\text{Income}}{\text{Revenue}}\times \frac{\text{Revenue}}{\text{Investment}}$

Residual income:

Residual income (RI) is an accounting measure of an income minus a dollar amount for required return on accounting measure of investment. The formula used to determine the RI is given below:

$\text{Return}\text{income}=\text{Income}-\left(\text{Required}\text{rate}\text{of}\text{return}\times \text{Investment}\right)$

To determine: The residual income for D Company.

b.

To determine

The economic value added (EAV) for D Company.