Problem: The overall sales and operating data for two different companies are given below:
Company A Company B
Sales $6,000,000 $8,000,000
Average Operating Assets $1,500,000 $2,000,000
Net Operating Profit $400,000 $200,000
Stockholders' Equity $1,000,000 $1,500,000
Each firm's minimum rate of return 14 % 12 %
(or Their Respective Cost of Capital)
REQUIRED:
Q1. Compute the overall ROI for each company.
Q2. Compute the overall Residual Income for each company.
Q3. Assume that Company A is presented with an investment opportunity that would require an initial investment in additional operating assets of $100,000 and would yield a ROI and an Internal Rate of Return of 15 %:
--If performance is being measured by ROI would Company A be likely to accept the opportunity? Reject? Why?
--If performance is being measured by residual income, would Company A be likely to accept the opportunity? Reject? Why?
d) Assume that Company B is presented with an investment opportunity that would require an initial investment in additional operating assets of $100,000 and would yield a ROI and an Internal Rate of Return of 15 %:
--If performance is being measured by ROI would Company B be likely to accept the opportunity? Reject? Why?
--If performance is being measured by residual income, would Company B be likely to accept the opportunity? Reject? Why?