Question

Required information

Use the following information for the Exercises below.

[The following information applies to the questions displayed below.]

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	$	45,000,000		$	3,420,000		$	18,000,000
Sporting goods		25,200,000			2,520,000			14,000,000

Exercise 9-10 Computing return on investment and residual income; investing decision LO A1

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 11% 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?

Answer 1

1) ROI = Net income / Avg. invested assets

Electronics = $3420000/$18000000 = 0.19 or 19%

Sporting Goods = $2520000 / $14000000 = 0.18 or 18%

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

2) Residual Income = Net income - (Avg. Invested assets * MARR)

Electronics = $3420000-($18000000*11%) = $3420000 - $1980000 = $1440000

Sporting Goods = $2520000 - ($14000000*11%) = $2520000 - $1540000 = $980000

Electronics department generated the most residual income for the company.

3) No, new investment opportunity not accepted. Because Existing ROI (19%) is hire then new

investment's ROI(15%).