Question

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	$	1,260,000	$	939,000	$	920,000
Cost of goods sold		779,000		689,000		668,000
Miscellaneous operating expenses		65,000		53,000		54,000
Interest and taxes		49,000		42,000		42,000
Average invested assets		8,473,000		1,977,000		3,254,000

Wescott is considering an expansion project in the upcoming year that will cost $5.1 million and return $455,000 per year. The project would be implemented by only one of the three divisions.


Required:
1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))

	ROI
Division A		%
Division B		%
Division C		%

2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.)

	Residual income (Loss)
Division A
Division B
Division C

3. Rank the divisions according to the ROI and residual income of each.

	Rank
Division A
Division B
Division C

4-a. Compute the return on investment on the proposed expansion project. (Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))

Return on Investment of Proposed Expansion Project

%

4-b. Is this an acceptable project?

Yes

No

5. Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI.

Division A
Division B
Division C

6. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be entered with a minus sign. Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

	ROI		Residual Income (Loss)
Division A		%
Division B		%
Division C		%

Answer 1