Question

The new department reported $11,250 net operating income with $75,000 average operating assets this year. The department has a new investment opportunity that would increase net operating income by $4,375 with $35,000 additional investment.

Q) What will be true given that the company's minimum required rate of return is 10%?

Multiple Choice

• If the division is evaluated on the basis of Residual income, the manager of the office product division would not accept the new investment because it is bad for the company.

• If the division is evaluated on the basis of ROI, the manager of the office product division would accept the new investment because it is good for the division.

• Regardless of whether the division is evaluated on the basis of ROI or Residual income, the manager will not accept the new investment because it is bad for the company.

• If the division is evaluated on the basis of Residual income, the manager of the office product division would accept the new investment because it is good for the division.

• If the division is evaluated on the basis of ROI, the manager of the office product division would not accept the new investment because it is bad for the company.

Answer 1

If the division is evaluated on the basis of Residual income, the manager of the office product division would accept the new investment because it is good for the division.

	Existing	Post Investment
Income	$        11,250	$                  15,625
Assets	$        75,000	$                110,000
ROI	15%	14%
Charge on capital	$      7,500.0	$              11,000.0
Residual Income	$      3,750.0	$                 4,625.0