1.1 (10 marks) Performance evaluation Chapter 11

Stone Tiles, a division of Marble Corporation, has an operating income for 2021 of $63,000 and total assets of $360,000 as at December 31, 2021. 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.

Rhonda Pebble, the manager of Stone Tiles has the opportunity to undertake a new project that will require an investment of $90,000. The investment would earn $9,000 for Stone Tiles.

Required:

a) What is the original ROI for Stone Tiles before making any additional investments?

b) What would the ROI be for Stone Tiles if this investment was undertaken? Would Rhonda Pebble, the manager of the Stone Tiles division, want to make this investment if she were evaluated based on ROI? Why or why not?

c) What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Marble Corporation? Why, or why not?

d) What would the RI be for Stone Tiles if this investment were undertaken? Would Rhonda Pebble, the manager of the Stone Tiles division, want to make this investment if she were evaluated based on RI? Why or why not?

e) What is the RI of the investment opportunity? Would the investment be desirable from the standpoint of Marble Corporation? Why, or why not?

f) Which performance measurement method, ROI or RI, promotes goal congruence? Why?