A Division Within a Firm Has an Average Return on Assets

question 1

Multiple Choice

A division within a firm has an average return on assets employed of 12% and is considering purchasing a new asset.The new asset is expected to generate cash flows of $17,000 per year for the next seven years but these have a beta coefficient of 1.3 compared to the portfolio return on the other assets in the division.The risk free rate of return is 2%; the weighted average cost of capital is 9%; and, the cost of the new asset is $170,000.
-What is the residual income?

• A)$(3,400)
• B)$5,100
• C)$0
• D)$6,800
• E)$15,300

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Definitions:

Unit Selling Price

The price a customer pays for one unit of a product or service.

Cost-volume-profit Chart

A graphical representation that shows the relationship between a company's costs, sales volume, and profit, used for planning and decision-making purposes.

Total Costs Line

Represents the aggregate of all costs (fixed and variable) associated with the production of goods or services, often illustrated graphically in cost-volume-profit analysis.

Break-even Sales

Break-even sales represent the amount of revenue required to cover all fixed and variable costs, resulting in neither profit nor loss.