Return On Investment measurement issues.. Green Company has
prepared the following information for three of its divisions:
Divison Historical
Costs of Investments Division Oprtng Income
X $560,000 $66,500
Y $532,000 $64,400
Z $350,000 $43,120
A. Compute each division’s return on investment and residual
income, assuming a 10% cost of capital
B. Suppose the net book value of each division’s investments
is half of the historical cost. Using net book value as the measure of
investment, compute each division’s return on investment and residual income,
assuming a 10% cost of capital.
C. Comment on the division rankings in (a) and (b).
D. If the division managers are rewarded on the basis of return
on investment or residual income, will they find it attractive to invest in
new, more costly equipment
2. Return on investment components – Alpha company would
like to examine the sales margin and asset turnover components of return on
investment for three of its divisions and has accordingly prepared the
following information:
Divison Investments Div
Operating Income Sales
E $575,000 $75,000 $500,000
F $700,000 $91,000 $542,000
G $1,000,000 $176,000 $763,000
A. Compute each division’s return on investment, sales
margin, and asset turnover.
B. Comment on the division’s relative rankings on the
rations computed in (a).
