Question
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
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 division’s 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.
Step by Step Solution
3.44 Rating (147 Votes )
There are 3 Steps involved in it
Step: 1
ANSWER IS lets calculate the Return on Investment ROI and Residual Income RI both with and without t...
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Management and Cost Accounting
Authors: Colin Drury
8th edition
978-1408041802, 1408041804, 978-1408048566, 1408048566, 978-1408093887
