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 $725,000 with average operating assets of

$3,625,000. 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 12 percent. Round all numbers to two decimal places.

Required:

. Compute the ROI of:

a. The division if the radio project is not undertaken.

b. The radio project alone.

c. The division if the radio project is undertaken.

. Compute the residual income of:

a. The division if the radio project is not undertaken.

b. The radio project alone.

c. The division if the radio project is undertaken.

. Do you suppose that Leslie will decide to invest in the new radio? Why or why not?

Problem