Lin Ceramics, a division of Sesnie Corporation, has an operating income of $63,000 and total assets of $360,000. The required rate of return for the company is 13%. The company is evaluating whether it should use ROI or RI as a measurement of performance for its division managers.
The manager of Lin Ceramics has the opportunity to undertake a new project that will require an investment of $90,000. This investment would earn $9,000 for Lin Ceramics.
Requirements
1. What is the original ROI for Lin Ceramics (before making any additional investment)?
2. What would the ROI be for Lin Ceramics if this investment opportunity were undertaken? Would the manager of the Lin Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not?
3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Sesnie Corporation? Why or why not?
4. What would the RI be for Lin Ceramics if this investment opportunity were undertaken? Would the manager of the Lin Ceramics division want to make this investment if she were evaluated based on RI? Why or why not?
5. What is the RI of the investment opportunity? Would the investment be desirable from the standpoint of Sesnie Corporation? Why or why not?
6. Which performance measurement method, ROI or RI, promotes goal congruence? Why?