Continental Publishing Company
The Magazine Division of Continental Publishing Company had the following financial data for the year:
$\begin{array}{ll}
\text { Assets available for use } & \$ 1,000,000 \text { Book Value } \
& \$ 1,500,000 \text { Market } V \text { alu } \
\text { Residual income } & \$ 100,000\
\text { Return on innvestment } & 15\%
\end{array}$

Refer to Continental Publishing Company.If the manager of the Magazine Division is evaluated based on return on investment,how much would she be willing to pay for an investment that promises to increase net segment income by $50,000?

Question

Continental Publishing Company
The Magazine Division of Continental Publishing Company had the following financial data for the year:
$\begin{array}{ll}
\text { Assets available for use } & \$ 1,000,000 \text { Book Value } \
& \$ 1,500,000 \text { Market } V \text { alu } \
\text { Residual income } & \$ 100,000\
\text { Return on innvestment } & 15\%
\end{array}$

Refer to Continental Publishing Company.If the manager of the Magazine Division is evaluated based on return on investment,how much would she be willing to pay for an investment that promises to increase net segment income by $50,000?

Quizplus · Accepted Answer

The manager of the Magazine Division is evaluated based on return on investment (ROI), which is 15% in this case. To calculate how much the manager would be willing to pay for an investment that promises to increase net segment income by $50,000, we need to use the formula for ROI:

ROI = Net Operating Income / Average Operating Assets

To find the new net operating income, we add the promised increase of $50,000 to the current residual income of $100,000:

New Net Operating Income = $100,000 + $50,000 = $150,000

To calculate the increase in Average Operating Assets that can be tolerated while maintaining a 15% ROI, we use the following formula:

$150,000 / (Average Operating Assets + $x) = 0.15

Solving for $x:

$150,000 / 0.15 - $1,000,000 = $500,000

Therefore, the manager would be willing to pay up to $500,000 for an investment that promises to increase net segment income by $50,000. Among the given answer choices, option B is the closest to this value.

Continental Publishing Company the Magazine Division of Continental Publishing Company

Continental Publishing Company
the Magazine Division of Continental Publishing Company