Comart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).
|
Investment Center |
Sales |
Net Income |
Average Invested Assets |
|
Electronics |
$20,000,000 |
$1,500,000 |
$ 7,500,000 |
|
Sporting goods |
16,000,000 |
1,600,000 |
10,000,000 |
(1) Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company? (2) Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company? (3) Assume the Electronics department is presented with a new investment opportunity that will yield a 15% return on assets. Should the new investment opportunity be accepted? Explain.