Thunder Sports Enterprises
The Basketball Division of Thunder Sports Enterprises reported the following financial data for the year:
$\begin{array}{ll}
\text { Assets available for use } & \$ 1,200,000 \text { Book Value } \
& \$ 1,500,000 \text { Market } V \text { alu } \
\text { Residual income } & \$ 108,000\
\text { Return on innvestment } & 14\%
\end{array}$
Refer to Thunder Sports Enterprises.If the manager of the Basketball 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 $60,000?

Question

Quizplus · Accepted Answer

The formula for calculating the target ROI is:

Target ROI = ROI + (increase in net segment income / assets available for use)

Plugging in the given values:

0.14 = ROI + (60,000 / 1,200,000)

Solving for ROI:

ROI = 0.14 - (60,000 / 1,200,000)

ROI = 0.09

Now, we can use the residual income formula to determine the maximum price the manager would be willing to pay for the investment:

Residual income = Net segment income - (Assets available for use x Target ROI)

108,000 = 60,000 - (A x 0.09)

A = 428,571.43

Rounding up, the manager would be willing to pay $428,572 for the investment, so the best choice is C.

Thunder Sports Enterprises the Basketball Division of Thunder Sports Enterprises

Thunder Sports Enterprises
the Basketball Division of Thunder Sports Enterprises