Question

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 $775,000 with operating assets of $5,425,000. 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%.

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.	$

Answer 1

Statement showing computations
Particulars	a. The division if the radio project is not undertaken.	b. The radio project alone.	c. The division if the radio project is undertaken.
Budgeted Income (BI)	775,000.00	640,000.00	1,415,000.00
Operating Assets	5,425,000.00	4,000,000.00	9,425,000.00
1) Return on Investment = Income/Operating Assets	14.29%	16.00%	15.01%
Required Income @14% of Operating assets	759,500.00	560,000.00	1319,500.00
2) Residual income = BI- Reqd Income	15,500.00	80,000.00	95,500.00