A division with total assets of 200,000 currently earns a ROI of 10%. It can make an additional investment of 20,000 for a 5 year life with nil residual value. The average operating income per annum from this investment would be 4,000. The divisions cost of capital is 11%.

Required

Compute and comment on the Return on Investment and the Residual Income, with and without the additional investment, and then advise the company whether it should make the additional investment.

Critique the relative advantages of ROI and RI for measuring divisional performance.