Question

Knight forward, a division of King Corp., has a net operating income of $60,000 and average operating assets of $300,000. The minimum required rate of return for the company is 15%. If the manager of the Knight forward division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $14,000 per year
Required:
What is the division’s ROI?

Answer 1

Answer:

20% and no

Explanation:

The computation of the return on the investment is shown below:

= Net operating income ÷ average operating assets

= $60,000 ÷ $300,000

= 20%

Now based on the investment and extra net operating income

The return on the investment is

= Net operating income ÷ average operating assets

= ($60,000 + $14,000) ÷ ($300,000 - $100,000)

= $74,000÷ $400,000

= 18.5%

Since this ROI would be less than the above ROI so the investment should not be made