Asked by Anusree Nambiar on Jul 02, 2024
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:
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.Would it be in the best interests of the company to make this investment?
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 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?
d.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?
Return On Investment
A financial metric used to evaluate the efficiency or profitability of an investment, calculated by dividing the net profit from the investment by the original cost of the investment.
Residual Income
The income that remains after deducting all required costs of capital from operating income.
Net Operating Income
This is the total profit of a company after operating expenses are subtracted from gross income but before income from investments, interest, and taxes are calculated.
- Evaluate the return on investment (ROI) and appreciate its repercussions.
- Figure out and scrutinize residual profits.
- Critically review investment opportunities by their residual income and ROI figures.
Learning Objectives
- Evaluate the return on investment (ROI) and appreciate its repercussions.
- Figure out and scrutinize residual profits.
- Critically review investment opportunities by their residual income and ROI figures.