Business, 12.08.2020 08:01 frankgore7836

The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%. Required ( support your answers with explanations):
a. Calculate the company's return on investment (ROI) and residual income (RI).
b. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?(Note: the decision model for the division manager is self-interested i. e. centers on the decision's effect on his evaluation criteria)
c. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?(Note: the decision model for the division manager is self-interested i. e. centers on the effect on his evaluation criteria)

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Answer from: pcartei

Here, we are preparing the cpmpany's return on investment (ROI), residual income (RI) etc

a. Computation of the Return on investment (ROI):

Return on investment = (Operating income/Average operating assets) * 100

Return on investment = ($380,000/$2,000,000) * 100

Return on investment = 0.19

Return on investment = 19%

Computation of the residual income (RI)

Residual income = [(Operating income - (Return on investment *Average operating assets)]

Residual income = $380,000 - (18% * $2,000,000)

Residual income = 380,000 - $360,000

Residual income = $20,000

b. Given Information

Investment = $70,000

Annual operating income = $12,950

Department's current return on investment = 20%

The actual return on investment for this project will equals:

= (Annual operating income / Investment) * 100

= ($12,950/$70,000) * 100

= 0.185

= 18.5%

Therefore, the manager of the division will not be inclined to request funds to make this investment that will yield an ROI of 18.5% because the department is already making 20%.

c. Given Information

Investment = $70,000

Annual operating income = $12,950

Current divisional residual income = $50,000

The actual residual income from this project will be:

= Annual operating income - (Return on investment * Investment)

= $12,950 - (18% * $70,000)

= $12,950 - $12,600

= $350

Therefore, the division manager will be inclined to request funds for this investment that will increase the residual Income marginally from $50,000 to $50,350 because her evaluation depends on an absolute figure and not a relative one (Return on investment).

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Answer from: Maryjasmine8001

The Clipper Corporation

a. The company's return on investment (ROI) and residual income (RI):

ROI = $380,000/$2,000,000 x 100

= 19%

RI = $380,000 - (18% of $2,000,000)

= 380,000 - $360,000

= $20,000

b. Investment = $70,000

Annual operating income = $12,950

Department's current return on investment = 20%

Actual return on investment for this project = $12,950/$70,000 x 100

= 18.5%

The manager of the division will not be inclined to request funds to make this investment that will yield an ROI of 18.5% when the department is already making 20%. This new investment will dilute his current ROI and adversely affect his performance evaluation.

c. Investment = $70,000

Annual operating income = $12,950

Current divisional residual income = $50,000

Actual residual income from this project,

= $12,950 - (18% of $70,000)

= $12,950 - $12,600

= $350

The division manager will be inclined to request funds for this investment that will increase her Residual Income marginally from $50,000 to $50,350, because her evaluation depends on an absolute figure and not a relative one (ROI).

Explanation:

1. The Clipper Corporation's Residual Income is equal to its operating income minus (minimum required return x operating assets).

2. The Clipper Corporation's Return on Investment is a derivative obtained from dividing the returns of its investment by the cost of the investment.

Answer from: Quest

answer; organizational;

Answer from: Quest

$2.00 for three shots.

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