Brookings Company evaluates its managers on the basis of return on investment. Division Three has a return on investment (ROI) of 15% while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return? a) ROI b) Residual income (RI) c) Both ROI and RI will motivate the manager to accept the project. d) Neither ROI nor RI will motivate the manager to accept the project.

Brookings Company evaluates its managers on the basis of return on investment. Division Three has a return on investment (ROI) of 15% while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return? a) ROI b) Residual income (RI) c) Both ROI and RI will motivate the manager to accept the project. d) Neither ROI nor RI will motivate the manager to accept the project.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

The Bechtelar Company is decentralized and has a required opportunity cost of capital of 14%. The North division, whose current return on investment (ROI) is 26% is considering an investment which will earn a return of 26%. The South division whose current ROI is 25%, is considering an investment which will earn a return of 27%. If the managers objective is to maximize ROI, each division will make the following choice. Please answer with full ROI formulas and include all numbers. Not just North or South.
QUESTION Rockwater management added two financial measures. Project profitability provided focus on the project as the basic unit for planning and control, and sales backlog helped reduce uncertainty of performance. Rockwater wanted to recognize the distinction between its two types of customers: Tier I customers, oil companies that wanted a high value-added relationship, and Tier II customers, those that chose suppliers solely on the basis of price. A price index, incorporating the best available intelligence on competitive position, was included to ensure that Rockwater could still retain Tier II customers’ business when required by competitive conditions. The company’s strategy, however, was to emphasize value-based business. An independent organization conducted an annual survey to rank customers’ perceptions of Rockwater’s services compared to those of its competitors. In addition, Tier I customers were asked to supply monthly satisfaction and performance ratings. Rockwater…
Return on Investment; Present Value Depreciation; Spreadsheet Application As indicatedin the chapter, there are goal congruence problems associated with the use of ROI as an indicator ofbusiness unit financial performance. One such problem relates to the bias against accepting new investments because of the adverse effect on a business unit’s ROI metric. Assume, for example, that themanager of a business unit can invest in a new, depreciable asset costing $75,000 and that this asset hasa 3-year life with no salvage value. Cash inflows associated with this investment are projected to beas follows: $30,000, $35,000, and $43,200. (Ignore taxes.) This scenario leads to an estimated internalrate of return (IRR) of 19.44%. Assume that the minimum required rate of return is 15%.Required1. Demonstrate, using the IRR function in Excel, that the IRR on this proposed investment is indeed19.44%.2. Calculate the year-by-year return on investment (ROI) on this proposed investment. For this…
Bersatu Berhad splits into two divisions, A and B, each with their own cost and revenue streams. Each of the divisions is managed by a divisional manager who has the power to make all investment decisions within the division. The cost of capital for both divisions is 12%. Historically, investment decisions have been made by calculating the return on investment (ROI) of any opportunities and at present.A new manager who has recently been appointed in division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company. Each division is currently considering the following separate investments: Project for Division A Project for Division B Capital requirement for investment RM 82.8 million RM40.6 million Sales generated by investment Rm44.6 million Rm21.8 million Net profit margin 28% 33% The company is seeking to maximise shareholder wealth. Required: Calculate both the return on investment and…
Which of the following statements is true? The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole. Land held for possible plant expansion would be included as an operating asset when computing return on investment (ROI).
The impact of a firm's cost of capital on managerial decisions Consider the following case: Marston Manufacturing Company has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should Marston Manufacturing Company accept or reject the project? O Reject the project O Accept the project On what grounds do you base your accept-reject decision? O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. O Division L's project should be accepted, because its return is less than the…
The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division. True False
1. Return on investment (ROI), residual income (RI), and economic-value added (EVA) are performance measures for subunit managers. Discuss the relative merit of these performance measures? -. 2. There may be a difference between the performance of a manager and the performance of the organization subunit for which the manager is responsible. Why is it important to make this distinction? 3. Do you agree with the general manager's assertion that managers should be rewarded only on the basis of their performance measures with no fixed salaries? Explain.
Exercise 10-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income (LO10-1, LO10-2] Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A $ 6,300,000 $ 1,260,000 340,200 Division B $ 10,300,000 $ 5,150,000 968,200 18.80% Division C $ 9,400,000 $ 1,880,000 24 Sales Average operating assets Net operating income Minimum required rate of return 2$ 249,100 20.00% 17.00% Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 20% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or…
12. The Forsite Company is screening three ideas for new services. Resource constraints allow only one idea to be commercialized at the present time. The following esti- mates have been made for the five performance criteria that management believes to be most important: RATING Performance Criterion Service A Service B Service C 0.8 0.3 Capital equipment investment required 0.6 0.7 0.3 0.9 Expected return on investment (ROI) Compatibility with current workforce skills 0.4 0.7 0.5 Competitive advantage 1.0 0.4 0.6 Compatibility with EPA requirements 0.2 1.0 0.5 14 a. Calculate a total weighted score for each alternative. Use a preference matrix and assume equal weights for each performance criterion. Which alternative is best? Worst? b. Suppose that the expected ROI is given twice the weight assigned to each of the remaining criteria. (The sum of weights should remain the same as in part [a].) Does this modification affect the ranking of the three potential services? BL
Are these all true? need it asap TIA. The objective of setting a transfer price is to motivate managers to behave in a manner that will increase the overall company income. Another advantage of decentralized operations is that assets and expenses may be duplicated across divisions. Service department charges are direct expenses to a profit center. When computing spending variances, actual results are compared to flexible budget?