mework Saved Help Save ExitSubm Check my work 9 Required inf

mework Saved Help Save& ExitSubm Check my work 9 Required information The following information applies to the questions displayed below.] Megamart, considered an investment center) a retailer of consumer goods, provides the following information on two of its departments (each Average Invested Assets Investment Center Electronics Sporting goods Sales $40,000,000 $2,880,000 $16,000,000 20,000,000 2,040,000 12,000,000 Income ent for each department. Using return oninvestment, which department is most efficient at using assets to generate returns for the company? 2. Assume a target income level of 12% of average invested assets. Compute residual income for each department, which department generated the most residual income for the company? 3. Assume the electronics department is presented with a new investment opportunity that will yield a 15% return on investment. Should the new investment opportunity be accepted? Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 Assume a target income level of 12% of average invested assets. Compute residual income for each department, which department generated the most residual income for the companv? Prev 4 5 l of 12 Next >

Solution

Answer 1.

Electronics:

Return on Investment = Income / Average Invested Assets
Return on Investment = $2,880,000 / $16,000,000
Return on Investment = 18%

Sporting Goods:

Return on Investment = Income / Average Invested Assets
Return on Investment = $2,040,000 / $12,000,000
Return on Investment = 17%

Electronics department is most efficient at using assets to generate returns for the company.

Answer 2.

Electronics:

Residual Income = Income - Required Return * Average Invested Assets
Residual Income = $2,880,000 - 12% * $16,000,000
Residual Income = $960,000

Sporting Goods:

Residual Income = Income - Required Return * Average Invested Assets
Residual Income = $2,040,000 - 12% * $12,000,000
Residual Income = $600,000

Electronics department is generating most residual income for the company.

Answer 3.

No, the new investment opportunity should not be accepted.