Capital Investments has three divisions. Each division\'s required rate of return is 15%. Planned operating results for 20X5 are as follows: Required: a) compute the current ROI for each division. b) Compute the current residual income for each division Solution Return on Investment = Gain from Investment /Cost of investment ROI for Division A = 15000000/1000000000 = 0.015 ROI for Division B = 25000000/125000000 = 0.2 ROI for Division C = 11000000/50000000 = 0.22 Current Residual Income from each division = Operating Profit -(15% rate of return on investment) Current Residual Income from each division A = 15000000-(1000000000x15%) = 15000000-15000000 =0 Residual Income of B = 25000000-(15% of 125000000) = 25000000-18750000 = $6250000 Residual Income of C = 11000000-(15% of 50000000) = 11000000-7500000= $3500000 .

1. Capital Investments has three divisions. Each division's required rate of return is 15%. Planned
operating results for 20X5 are as follows:
Required:
a) compute the current ROI for each division.
b) Compute the current residual income for each division
Division Operating Income Investment
A $15,000,000 $100,000,000
B $25,000,000 $125,000,000
C $11,000,000 $50,000,000
Solution
Return on Investment = Gain from Investment /Cost of investment
ROI for Division A = 15000000/1000000000 = 0.015
ROI for Division B = 25000000/125000000 = 0.2
ROI for Division C = 11000000/50000000 = 0.22
Current Residual Income from each division = Operating Profit -(15% rate of return on
investment)
Current Residual Income from each division A = 15000000-(1000000000x15%) = 15000000-
15000000 =0
Residual Income of B = 25000000-(15% of 125000000) = 25000000-18750000 = $6250000
Residual Income of C = 11000000-(15% of 50000000) = 11000000-7500000= $3500000