Universal Electronics, Inc. (UEI), which started operations one year ago, has two divisIOn Invest heavily in R&D, which is assumed to benefit five years. R&D spending is made uniformly throughout the year. UEI has a cost of capital of 11 percent. Selected financial information for the two divisions (in thousands of dollars) for the year just completed follows. ner and Commercial. Both divisions Consuner $54,000 10,650 35,500 4,200 4,200 Comnercial $85,000 11,925 39,750 4,000 4,200 Sales revenue Divisional inoone Diviaional investnent Current liabilities RAD Required: Evaluate the performance of the two divisions assuming UEl uses return on investment (ROI).

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division. True False

Exercise 10-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income (LO10-1, LO10-2] Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A $ 6,300,000 $ 1,260,000 340,200 Division B $ 10,300,000 $ 5,150,000 968,200 18.80% Division C $ 9,400,000 $ 1,880,000 24 Sales Average operating assets Net operating income Minimum required rate of return 2$ 249,100 20.00% 17.00% Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 20% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or…