ROI, Residual Income, and Net Present Value (L.0.4): Eighties Co. invested $1 billion in an asset in 1985 to develop a patented laser measurement process. Eighties Co. established its Yuppie Division to operate the laser operation. Delays caused by patent infringement litigation prevented the start- up of operations until the beginning of 1991. Before-tax cash flows that year equalled $550 million. This cash flow is expected to continue annually through the end of 1995. At the end of the project life, the asset will have no value. The $1 billion asset is depreciated using straight-line and a five year life starting in 1991. In 1990, Eighties Co. established its Porcha Division. The Porcha Division was off to a fast start in a low-technology plastics operation. Porcha invested $1.5 billion in a plastics molding plant. Before-tax cash flows from the plant total $550 million per year and are expected to continue annually for each of the five years beginning in 1991. The $1.5 billion asset is depreciated using straight-line over five years starting in 1991. It will have no value at the end of five years. Eighties Co. uses the straight-line method for depreciation. The company has a before-tax cost of capital of 15 percent and evaluates divisions based on return on investment and residual income. The company evaluates divisions on the basis of return on initial investment (that is, annual before-tax net income divided by $1 billion for Yuppie and by $1.5 billion for Porcha).

Required:

a. Which division's project has the greater net present value?

b. Which division has the greater ROI and RI?

c. If the rankings differ. how is this explained?