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Return on investment and residual income questions

Tahoe Company has operating assets of $20,000,000. The company's operating income for the most recent accounting period was $2,640,000. The Utah Division of Tahoe controls $7,500,000 of the company's assets and earned $1,170,000 of its operating income. Tahoe's desired ROI is 10 percent. Tahoe has $900,000 of additional funds to invest. The manager of the Utah division believes that his division could earn $126,000 on the additional funds. The highest investment opportunity to any of the company's other divisions is 11 percent.

Required.

A. If ROI is used as the sole performance measure, would the manager of the Utah Division be likely to accept or reject the additional funding? Why or Why not?

B. Would Tahoe Company benefit if the manager of the Utah Division accepted the additional funds. Why or why not?

C. If residual income is used as the sole performance measure would the manager of the Utah Division be likely to accept or reject the additional funding? Why or why not?

Solution Preview

A. If ROI is used as the sole performance measure, would the manager of the Utah Division be likely to accept or reject the additional funding? Why or Why not?

Current ROI of Utah =Net Operating Income/Divisional Operating Assets
=1170000/7500000
=15.6%

ROI = Additional Net Operating Income/Additional ...

Solution Summary

Response provides steps to calculate return on investment and residual income questions

$2.19