Return on Investment and Investment Decisions Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product-a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert. The budgeted income of the division was $975,000 with operating assets of $3,925,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 14%. Required: 1. Compute the ROI of the following (round to the nearest whole percent): a. The division if the radio project is not undertaken. b. The radio project alone. c. The division if the radio project is undertaken. 2. Compute the residual income of the following: a. The division if the radio project is not undertaken. b. The radio project alone. c. The division if the radio project is undertaken. 25 16 20 80,000 % % % 3. This depends on whether Leslie's division is evaluated on the basis of ROI or on the basis of residual income. Overall division ROI wills decrease the basis for evaluation, she will decline the investment. On the other hand, residual income for the project is positive and will raise residual income. If the division is evaluated on the basis of residual income, the project will be accepted ; so if ROI i: overall
Return on Investment and Investment Decisions Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product-a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert. The budgeted income of the division was $975,000 with operating assets of $3,925,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 14%. Required: 1. Compute the ROI of the following (round to the nearest whole percent): a. The division if the radio project is not undertaken. b. The radio project alone. c. The division if the radio project is undertaken. 2. Compute the residual income of the following: a. The division if the radio project is not undertaken. b. The radio project alone. c. The division if the radio project is undertaken. 25 16 20 80,000 % % % 3. This depends on whether Leslie's division is evaluated on the basis of ROI or on the basis of residual income. Overall division ROI wills decrease the basis for evaluation, she will decline the investment. On the other hand, residual income for the project is positive and will raise residual income. If the division is evaluated on the basis of residual income, the project will be accepted ; so if ROI i: overall
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Return on Investment and Investment Decisions
Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product-a weather radio that would put out a warning if the county in which the
listener lived were under a severe thunderstorm or tornado alert.
The budgeted income of the division was $975,000 with operating assets of $3,925,000. The proposed investment would add income of $640,000 and would require an
additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 14%.
Required:
1. Compute the ROI of the following (round to the nearest whole percent):
a. The division if the radio project is not undertaken.
b. The radio project alone.
c. The division if the radio project is undertaken.
2. Compute the residual income of the following:
a. The division if the radio project is not undertaken.
b. The radio project alone.
c. The division if the radio project is undertaken.
3. This depends on whether Leslie's division is evaluated on the basis of ROI or on the basis of residual income. Overall division ROI wills decrease
the basis for evaluation, she will decline
the investment. On the other hand, residual income for the project is positive
and will raise
residual income. If the division is evaluated on the basis of residual income, the project will be accepted
25
16
20
%
%
%
80,000
; so if ROI is
overall
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