The Manager of the West Division of Beach Clothing Company

Multiple Choice

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine.The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000.The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000.The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent.Ignoring taxes, how much is the residual income of the West division if the embroidery machine is purchased?

A) $2,545,000
B) $1,320,000
C) $2,860,000
D) $4,456,000