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    Textron Industries: residual income, ROI, evaluate a plant expansion opportunity

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    Lakeesha Roberts is a successful division manager for Textron Industries. Her division's ROI currently is 22%. Roberts is evaluating a plant expansion opportunity that is expected to produce an annual income of $500,000 and require an investment of $3,000,000. The corporation's cost of capital is 12%.

    a. If Roberts' performance is based on ROI, will she be inclined to make the investment? Explain.
    b. Calculate the residual income for the proposed investment.
    c. If Robert's performance is based on residual income, will she be inclined to make the investment? Explain.
    d. Would corporate management encourage Roberts to make the investment? Explain.

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    Solution Preview

    a. If Robert's performance is based on ROI, will she be inclined to make the investment? Explain.
    In the project, PV = initial investment = -$3,000,000
    The annual return is $500,000
    Then the ROI of the project is 500K/3000K = 16.7%
    Since it is lower than the division's ROI, she ...

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