1. What is the original return on investment (ROI) for Rouse Ceramics (before making any additional investment)? 2. What would the ROI be for Rouse Ceramics if this investment opportunity were undertaken? Would the manager of the Rouse 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 Piper Corporation? Why or why not? 4. What would the residual income (RI) be for Rouse Ceramics if this investment opportunity were to be undertaken? Would the manager of the Rouse Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? 5. What is the Rl of the investment opportunity? Would the investment be desirable from the standpoint of Piper Corporation? Why or why not? 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why? Rouse Ceramics, a division of Piper Corporation, has an operating income of $66,000 and total assets of $440,000. The required rate of return for the company is 10%. The company is evaluating whether it should use return on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of Rouse Ceramics has the opportunity to undertake a new project that will require an investment of $160,000. This investment would earn $19,200 for the company. Read the requirements. Requirement 1. What is the original return on investment (ROI) for Rouse Ceramics (before making any additional investment)? First determine the formula to calculate the ROI. Operating income Total assets = ROI (Enter the percentage to two decimal places.) The original return on investment (ROI) for Rouse Ceramics is 15 % Requirement 2. What would the ROI be for Rouse Ceramics if this investment opportunity were undertaken? Would the manager of the Rouse Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not? (Enter the percentage to two decimal places.) If this investment opportunity were undertaken, the ROI would be 14.2 %. If the manager of this division is evaluated based on ROI she would not want to make this investment. Investing in the new project would decrease the division's ROI. Requirement 3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Piper Corporation? Why or why not? (Enter the percentage to two decimal places.) The ROI of the investment opportunity is 12 % From the standpoint of Piper Corporation this investment is desirable. The ROI of the investment opportunity is more than Piper's required rate of return. Requirement 4. What would the residual income (RI) be for Rouse Ceramics if this investment opportunity were to be undertaken? Would the manager of the Rouse Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? First determine the formula to calculate the RI. Operating income - ( Total assets * Target rate of return ) = RI Let's begin by calculating the residual income (RI) for Rouse Ceramics if the investment is not made. The residual income (RI) for Rouse Ceramics if the additional investment is not made is 25200
