1 answer

Return on investment and residual income Welch Insurance Company (WIC) earned operating income of $24,000,000 on...

Question:

Return on investment and residual income Welch Insurance Company (WIC) earned operating income of $24,000,000 on operating as

Return on investment and residual income Welch Insurance Company (WIC) earned operating income of $24,000,000 on operating assets of $200,000,000 during 2018. The Automobile Insurance Division earned $4,770,000 on operating assets of $36,000,000. WIC has offered the Automobile Division $4,000,000 of additional operating assets. The manager of the Automobile Insurance Division believes she could use the additional assets to generate operating income amounting to $480,000. WIC has a desired return on investment (ROI) of 10 percent. Required a. Calculate the return on investment (ROI) for WIC, the Automobile Insurance Division, and the additional investment opportunity. b. Calculate the residual income (RI) for WIC, the Automobile Insurance Division, and the additional investment opportunity

Answers

Answer 1:

WIC Automobile Insurance Division 13.25% 13.2 Additional Investment Opprtunity 12.00% Return on Investment (ROI) 12.00%

Working:

WIC Operating Income (OI) Operating Assets (OA) Return on Investment ROI = 01/0A in %age $24,000,000 $200,000,000 12.00% Auto

Answer 2:

WIC Automobile Insurance Division $1,170,000 Additional Investment Opprtunity $80,000 Residual Income $4,000,000

Working:

WIC Operating Income (OI) Operating Assets (OA) Capital Charges (CC = OA * 10%) Residual Income (OI-CC) = $24,000,000 $200,00

.

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