Jaguar Division of Automobile Delights,is evaluated based on residual income generated.In the most recent year,the Jaguar Division generated a residual income of $2,000,000 and net income of $5,000,000.The target rate of return for all divisions of Automobile Delights is 20%.What was the return on investment for the Jaguar Division?
A)40%
B)13%
C)20%
D)33%

Question

Quizplus · Accepted Answer

Return on investment (ROI) = Residual income / Average operating assets
Average operating assets = Net operating assets (beginning of year + end of year) / 2
Net operating assets = Total assets - Total liabilities
Net operating assets for Jaguar Division are not given in the problem. Hence, we cannot calculate ROI directly. However, we can use the formula of ROI in terms of residual income and net income to calculate it:
ROI = Target rate of return + (Residual income / Average operating assets)
20% + ($2,000,000 / ((Total assets - Total liabilities) / 2)) = (Net income / Total assets)
20% + ($2,000,000 / ((Total assets - Total liabilities) / 2)) = $5,000,000 / Total assets
($2,000,000 / ((Total assets - Total liabilities) / 2)) = $3,000,000 / Total assets
($2,000,000 / ((Total assets - Total liabilities) / 2)) = 0.3
Total assets / ((Total assets - Total liabilities) / 2) = 6.6667
Total assets - Total liabilities = (Total assets / 6.6667) * 1.6667
Total assets - Total liabilities = 0.25 * Total assets
Total liabilities = 0.75 * Total assets
ROI = 20% + ($2,000,000 / ((Total assets - (0.75 * Total assets)) / 2))
ROI = 20% + ($2,000,000 / (0.125 * Total assets))
ROI = 20% + (16 * $2,000,000 / Total assets)
ROI = 20% + ($32,000,000 / Total assets)

If we assume that the Jaguar Division has no non-operating assets, then the total assets and net operating assets would be the same. We can then use the given information to calculate ROI for the Jaguar Division:

ROI = 20% + ($2,000,000 / ((Total assets - Total liabilities) / 2))
ROI = 20% + ($2,000,000 / (Net income / 0.2))
ROI = 20% + (10 * $2,000,000 / $5,000,000)
ROI = 20% + 8%
ROI = 28%

However, this assumption may not hold true in reality, so the most accurate answer would be D) 33%, as we cannot calculate ROI for the Jaguar Division with the given information.

Jaguar Division of Automobile Delights,is Evaluated Based on Residual Income