Problem - Evaluating Managerial Performance, Proposed Project Impact on Return on Investment, Residual Income
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 $ 1,255,000 $ 920,000 $ 898,000
Cost of goods sold 776,000 675,000 652,000
Miscellaneous operating expenses 64,000 52,000 53,100
Interest and taxes 48,000 41,000 41,500
Average invested assets 8,300,000 1,930,000 3,215,000
Wescott is considering an expansion project in the upcoming year that will cost $5 million and return $450,000 per year. The project would be implemented by only one of the three divisions.
Required:
1. Compute the ROI for each division.
2. Compute the residual income for each division.
3. Rank the divisions according to the ROI and residual income of each.
4-a. Compute the return on the proposed expansion project.
4-b. Is this an acceptable project?
No
Yes
5. Without any additional calculations, state whether the proposed project would increase or decrease each division's ROI and state whether the division manager would accept or reject the proposed project.
6. Compute the new ROI and residual income for each division if the project was implemented within that division.