Question

Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).

Investment Center	Sales			Income			Average Invested Assets
Electronics	$	41,000,000		$	2,624,000		$	16,400,000
Sporting goods		18,600,000			1,860,000			12,400,000

1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?
2. Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?
3. Assume the Electronics department is presented with a new investment opportunity that will yield a 15% return on investment. Should the new investment opportunity be accepted?

Return on Investment
	Choose Numerator:	/	Choose Denominator:	=	Return on Investment
		/		=	Return on Investment
Electronics		/		=
Sporting Goods		/		=
Which department is most efficient at using assets to generate returns for the company?

Investment Center	Electronics	Sporting Goods
Net income
Target net income
Residual income
Which department is most efficient at using assets to generate returns for the company?

Should the new investment opportunity be accepted?

Answer 1

Answer :

(1) Calculation of Return on Investment :

Investment Centre	Net Income	/	Average Invested Assets	=	Return On Investment
Electronics	2,624,000	/	16,400,000	=	16%
Sporting Goods	1,860,000	/	12,400,000	=	15%

Electronics department is most efficient at using assets to generate returns for the company.

(2)

	Electronics	Sporting Goods
Net income	2,624,000	1,860,000
Target net income	(1,968,000)	(1,488,000)
Residual income	656,000	372,000

Electronics Department generated the most residual income for the company.

(3) Yes,  the new investment opportunity should be accepted.