1. Bellco, a division of Becker International Corporation, is operated under the direction of Antoin Sedatt. Bellco is an independent investment center with approximately $73,890,000 of assets that generate approximately $10,640,000 in annual net income. Becker International has additional investment capital of $14,000,000 that is available for the division managers to invest. Mr. Sedatt is aware of an investment opportunity that will provide an 13 percent annual net return. Becker Internationals desired rate of return is 12 percent.

Required

a. Assume that Mr. Sedatts performance is evaluated based on his ability to maximize residual income. Compute residual income using the following two assumptions: Bellco retains its current asset base and Bellco accepts and invests the additional $14,000,000 of assets. Determine whether Mr. Sedatt should accept the opportunity to invest additional funds.

b. Which technique (ROI or residual income) is more likely to result in suboptimization?

Current Residual Income
Residual Income with additional investment
Whether Mr. Sedatt should accept the opportunity to invest additional funds?

Which technique is more likely to result in suboptimization?