2 Evaluating New Investments Using Return on Investment

In today’s business environment, the need for critical thinking skills for both smaller and larger companies is much more prevalent and employers are looking for these skills more and more each day. This Assignment will help you gain some vital experience in writing down your critical thinking process with the intent of showing someone else how to follow your logic.

You will be using Exercise 11-12 from your homework Assignment and breaking it down on a step by step basis explaining what you did to solve it and why. Be sure to put those steps in a word document in paragraph format. You may use bullet points as a sort of “table” to highlight the steps for clarity (and I recommend this step), but paragraph format is still required.

The word document should be a minimum of at least one page and no more than three pages in length. Good luck and remember to enjoy this Assignment as critical thinking is a part of business today so you will be doing this throughout your career–it may be in by verbal explanation and not in written form or you may have to write down instructions for a subordinate to follow

EXERCISE 11–12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income LO11–1, LO11–2

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

Division A

Division B

Division C

Sales

$12,400,000

$35,500,000

$20,400,000

Average operating assets

$3,100,000

$7,100,000

$5,100,000

Net operating income

$508,400

$426,000

$510,000

Minimum required rate of return

7.00%

7.50%

10.00%

Required:

  1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover.
  2. Compute the residual income for each division.
  3. Assume that each division is presented with an investment opportunity that would yield a 8% rate of return.
    1. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why?
 
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