Question

Coolbrook Company has the following information available for the past year:

  

River Division

Stream Division

Sales revenue	$	1,201,000		$	1,810,000
Cost of goods sold and operating expenses		888,000			1,297,000
Net operating income	$	313,000		$	513,000
Average invested assets	$	1,090,000		$	1,550,000

The company’s hurdle rate is 6.51 percent.

Required:
1. Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

	River Division	Stream Division
ROI	%	%
Residual Income (Loss)

2. Recalculate ROI and residual income for each division for each independent situation that follows: (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

a. Operating income increases by 9 percent.

	River Division	Stream Division
ROI	%	%
Residual Income (Loss)

b. Operating income decreases by 10 percent.

	River Division	Stream Division
ROI	%	%
Residual Income (Loss)

c. The company invests $246,000 in each division, an amount that generates $101,000 additional income per division.

	River Division	Stream Division
ROI	%	%
Residual Income (Loss)

d. Coolbrook changes its hurdle rate to 4.51 percent.

	River Division	Stream Division
ROI	%	%
Residual Income (Loss)

Answer 1

1. Calculate return on investment (ROI) and residual income for each division for last year

	River Division	Stream Division
ROI	28.72%	33.10%
Residual Income (Loss)	$242041	$ 412095

ROI

River Division = [ 313000 / 1090000 ] x 100 = 28.72%

Stream Division = [ 513000 / 1550000 ] x 100 = 33.10%

Residual Income (Loss)

River Division = 313000 – [ 1090000 x 6.51%] = $242041

Stream Division = 513000 – [ 1550000 x 6.51% ] = $ 412095

2(a). Recalculate ROI and residual income for each division for each independent situation that Operating income increases by 9 percent

	River Division	Stream Division
ROI	31.30%	36.08%
Residual Income (Loss)	$ 270211	$ 4582655

ROI

River Division = [ (313000x1.09) / 1090000 ] x 100 = 31.30%

Stream Division = [ (513000x1.09) / 1550000 ] x 100 = 36.08%

Residual Income (Loss)

River Division = (313000x1.09) – [ 1090000 x 6.51%] = $ 270211

Stream Division = (513000x1.09) – [ 1550000 x 6.51% ] = $ 4582655

2(b)Recalculate ROI and residual income for each division for each independent situation that Operating income decreases by 10 percent

	River Division	Stream Division
ROI	25.84%	29.79%
Residual Income (Loss)	$ 210741	$ 360795

ROI

River Division = [ (313000x0.90) / 1090000 ] x 100 = 25.84%

Stream Division = [ (513000x0.90) / 1550000 ] x 100 = 29.79%

Residual Income (Loss)

River Division = (313000x0.90) – [ 1090000 x 6.51%] = $ 210741

Stream Division = (513000x0.90) – [ 1550000 x 6.51% ] = $ 360795

2(c)Recalculate ROI and residual income for each division for each independent situation that The company invests $246,000 in each division, an amount that generates $101,000 additional income per division

	River Division	Stream Division
ROI	30.99%	34.19%
Residual Income (Loss)	$ 327026	$497080

ROI

River Division = [ (313000+101000) / (1090000+246000) ] x 100 = 30.99%

Stream Division = [ (513000+101000) / (1550000+246000) ] x 100 = 34.19%

Residual Income (Loss)

River Division = (313000+101000) – [ (1090000+246000) x 6.51%]

= $ 327026

Stream Division = (513000+101000) – [ (1550000+246000)x 6.51% ]

= $497080

2(d). Recalculate ROI and residual income for each division for each independent situation that Coolbrook changes its hurdle rate to 4.51 percent

	River Division	Stream Division
ROI	28.72%	33.10%
Residual Income (Loss)	$ 263841	$ 443095

ROI

River Division = [ 313000 / 1090000 ] x 100 = 28.72%

Stream Division = [ 513000 / 1550000 ] x 100 = 33.10%

Residual Income (Loss)

River Division = 313000 – [ 1090000 x 4.51%] = $ 263841

Stream Division = 513000 – [ 1550000 x 4.51% ] = $ 443095