Contrasting ROI and Residual Income
Please see attached.
JW & Associates of Boston has two divisions that operate in Allston and Chelsea. Selected data on the two divisions follow:
Sales…… $9,000,000 $20,000,000
Net operating income… $630,000 $1,800,000
Average operating assets… $3,000,000 $10,000,000
1. Compute the return on investment for each division.
2. Assume the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division.
3. Is the Chelsea division’s greater residual income an indication that it is better managed?