Evaluating New Investment Using Return on Investment (ROI) and Residual Income
Not what you're looking for?
E12-10
Evaluating New Investment Using Return on Investment and Residual Income.
Division A Division B Division C
Sales 6000000 10000000 8000000
Average operating assets 1500000 5000000 2000000
Pretax income 300000 900000 180000
Minimum required rate of return 15% 18% 12%
1. Compute the return on investment (ROI) for each division.
2. Compute the residual income for each division.
3. Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%.
a. If performance is being measured by ROI, which division or division will probably accept the opportunity? Reject? Why?
b. If performance is being measured by residual income, which division or division will probably accept the opportunity? Reject? Why?
Purchase this Solution
Solution Summary
The solution calculates the ROI and the residual income for three divisions together with explanations and conclusions.
Purchase this Solution
Free BrainMass Quizzes
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media