79.
The following information has been gathered for the Door Division:
Return on investment (ROI)
15.0%
Sales
$120,000
Operating assets
$60,000
Cost of Capital
12.0%
Profit margin
7.5%
Compute the Door Division’s residual income.
80.
Use the following information to compute residual income:
Sales
Operating income
Average current assets
Cost of capital
Return on investment
81.
The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
A
B
C
Sales
$320,000
$540,000
?
Net operating income
60,000
?
$24,000
Residual income
?
36,000
14,400
Average Division
Assets
250,000
320,000
80,000
Cost of Capital
12%
16%
Profit Margin
20%
5%
Asset Turnover
?
4.0
Return on investment
15%
What was A Division’s residual income last year?
82.
The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
A
B
C
Sales
$320,000
$540,000
?
Net operating
income
60,000
?
$24,000
Residual income
?
36,000
14,400
Average Division
Assets
250,000
320,000
80,000
Cost of Capital
12%
16%
Profit Margin
20%
5%
Asset Turnover
?
4.0
Return on
investment
15%
What was B Division’s return on investment (ROI) last year?
83.
The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
A
B
C
Sales
$320,000
$540,000
?
Net operating
income
60,000
?
$24,000
Residual income
?
36,000
14,400
Average Division
Assets
250,000
320,000
80,000
Cost of Capital
12%
16%
Profit Margin
20%
5%
Asset Turnover
?
4.0
Return on
investment
15%
What was C Division’s cost of capital last year?
84.
Residual income is a better measure for performance evaluation of an investment center
manager than return on investment (ROI) because: (CMA adapted)
85.
Which one of the following items would most likely not be incorporated into the
calculation of a division’s investment base when using the residual income approach for
performance measurement and evaluation? (CMA adapted)
86.
Residual income is a better measure for performance evaluation of an investment center
manager than return on investment because: (CMA adapted)
87.
Which of the following items would not be an example of an economic value added (EVA)
88.
89.
90.
91.
92.
Level return on investments (ROI) over the life of a long-term project is more likely when
ROI is computed using:
93.
Using ending balances for the investment base in computing return on investment (ROI)
might encourage managers to acquire assets:
94.
Using beginning balances for the investment base in computing return on investment
(ROI) might encourage managers to acquire assets:
14–75
95.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10–
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using historical cost and gross book value?
Year 1
Year 2
Year 3
A.
20.0%
25.0%
30.5%
B.
25.0%
28.0%
32.0%
C.
18.0%
26.5%
28.0%
D.
30.0%
35.0%
40.5%
14–76
96.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10–
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using historical cost and net book value?
Year 1
Year 2
Year 3
A.
21.5%
34.0%
42.0%
B.
22.2%
31.3%
43.6%
C.
23.0%
32.0%
47.0%
D.
24.8%
35.0%
49.5%
97.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10–
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using current costs and gross book value?
Year 1
Year 2
Year 3
A.
14.0%
18.0%
22.4%
B.
13.0%
14.0%
14.0%
C.
12.0%
10.1%
9.5%
D.
14.0%
12.4%
10.7%
14–78
98.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10–
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using current costs and net book value?
Year 1
Year 2
Year 3
A.
14.6%
15.9%
16.0%
B.
15.8%
15.9%
14.9%
C.
15.6%
15.5%
15.3%
D.
15.6%
15.8%
11.9%
14–79
99.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10–
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the residual income for each year, assuming the cost of capital is 15% and Marvin
uses historical costs and gross book values to compute residual income?
Year 1
Year 2
Year 3
A.
$200,000
$400,000
$620,000
B.
$200,000
$200,000
$200,000
C.
$250,000
$200,000
$450,000
D.
$250,000
$400,000
$375,000
14–80
100.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10–
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the residual income for each year, assuming the cost of capital is 15% and Marvin
uses historical costs and net book values to compute residual income?
Year 1
Year 2
Year 3
A.
$200,000
$435,000
$690,000
B.
$260,000
$520,000
$800,000
C.
$260,000
$420,000
$540,000
D.
$280,000
$400,000
$750,000