Question

The retail segment of Nevada Corporation currently reports income of $3,000,000 and total assets of $20,000,000....

The retail segment of Nevada Corporation currently reports income of $3,000,000 and total assets of $20,000,000. The segment is an investment center, and the minimum required return is 10%. The segment manager has identified a new market in which to sell its products. It is estimated that the new market will require an investment of $1,000,000 in assets and will generate additional net income of $120,000. 1. Calculate the current return on investment for the retail segment (without the new investment). Ans: ______________ % 2. Calculate the current residual income for the retail segment (without the new investment). Ans: $______________ 3. Calculate the residual income for the new market. Ans: $_______________ 4. Is it in the best interests of Nevada Corporation for retail segment to invest in the new market? Yes No (circle one) Why?

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The rate of return on the additional investment is lower than the rate of return of current operations. However, the rate of return on new investment is more than the minimum rate of 10%. Therefore, it is in best interest of Newada to invest in new market.

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