EXERCISE 117 Contrasting Return on Investment (ROI) and Residual Income [LO1 LO2

EXERCISE 117 Contrasting Return on Investment (ROI) and Residual Income [LO1 LO2]Rains Nickless Ltd. of Australia has two divisions that operate in Perth and Darwin. Selected data on the two divisions follow:DivisionPerth DarwinSales . . . . . . . . . . . . . . . . . . . . . . . $9000000 $20000000Net operating income . . . . . . . . . . $630000 $1800000Average operating assets . . . . . . . $3000000 $10000000Required:1. Compute the return on investment (ROI) for each division.2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division.3. Is the Darwin Divisions greater residual income an indication that it is better managed?Explain.