Question - Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).
|
Investment Center
|
Sales
|
Net Income
|
Average Invested Assets
|
|
Electronics
|
$9,800,000
|
$586,500
|
$3,450,000
|
|
Sporting goods
|
8,100,000
|
756,000
|
4,200,000
|
1-a Compute return on investment for each department.
1-b Using return on investment, which department is most efficient at using assets to generate returns for the company?
- Electronics
- Sporting goods
2-a Assume a target income level of 11.3% of average invested assets. Compute residual income for each department.
2-b Which department generated the most residual income for the company?
- Electronics
- Sporting goods
3. Assume the Electronics department is presented with a new investment opportunity that will yield a 14.2% return on investment. Should the new investment opportunity be accepted?
- No, the new investment opportunity should not be accepted
- Yes, the new investment opportunity should be accepted