segmented net income roi and ri making investment decisions quality cycles inc has t 1571671

Segmented Net Income, ROI, and RI; Making Investment Decisions.Quality Cycles, Inc., has two divisions—Cruisers and Racers. The following segmented financial information is for the most recent fiscal year:

The Cruisers division had average operating assets totaling $5,700,000 for the year, and the Racers division had average operating assets of $9,600,000. Assume the cost of capital rate is 10 percent, and the company’s tax rate is 30 percent.

Required:

a. Prepare a segmented income statement using the format presented in . Include the profit margin ratio for each division at the bottom of the segmented income statement.

b. Calculate ROI for each division.

c. Calculate RI for each division.

d. Summarize the answers to parts a, b, and c using the format presented in . What does this information tell us about each division?

e. Assume each division of Quality Cycles, Inc., is considering separate investment opportunities expected to yield a return of 16 percent, well above the company’s minimum required rate of return of 10 percent. Each investment opportunity will require $4,000,000 in average operating assets and yield operating income of $640,000.

6. Using the information presented at the beginning of this problem, and the new investment proposal information presented previously, calculate each division’s overall ROI assuming the new investment is accepted.

7. Compare your results in requirement e.1 to each division’s ROI prior to the new investment (calculated in requirement b). Which division(s) will likely accept the proposal and which will likely reject the proposal using ROI as the measure? Explain.

8. Using the information presented at the beginning of this problem, and the new investment proposal information presented previously, calculate each division’s overall RI assuming the new investment is accepted.

9. Compare your results in requirement e.3 to each division’s RI prior to the new investment (calculated in requirement c). Which division(s) will likely accept the proposal and which will likely reject the proposal using RI as the measure? Explain.

10. Assume the goal is to maximize company profit. Which measure do you think is best in deciding whether to accept a new investment proposal, ROI or RI? Explain.