Based on the data in Exercise 24-10, assume that management has established an 8% minimum acceptable rate of return for invested assets.

Based on the data in Exercise 24-10, assume that management has established an 8% minimum acceptable rate of return for invested assets.

a. Determine the residual income for each division.

b. Which division has the most residual income?


Answer:

Retail 
Division 
Commercial 
Division 
Internet 
Division 
Income from operations……………………………   $130,000 $72,000 $137,500 
Minimum amount of income from 
operations: 
 $650,000 × 8%……………………………………  52,000  
$400,000 × 8%…………………………………… 
$550,000 × 8%……………………………………     
32,000  
    44,000 
Residual income…………………………………… $  78,000 $40,000 $  93,500 

b. 

Internet Division 

Determine the average rate of return for a project that is estimated to yield total income of $148,500 over

Determine the average rate of return for a project that is estimated to yield total income of $148,500 over five years, has a cost of $300,000, and has a $30,000 residual value.

Answer:

Estimate average annual income $29,700 

($148,500 ÷ 5 years) 

Average investment $165,000 

[($300,000 + $30,000) ÷ 2] 

Average rate of return 18% 

($29,700 ÷ $165,000)