AIP 6.3 Evaluating a New Product With ROI LO 4

An Italian wholesaler of Mexican crafts is considering the importing of rugs. The rugs are hand-woven in southern Mexico and use natural dyes. The rugs cost an average of 250 including transportation and handling. The wholesaler plans to sell them in Italy for 300. Therefore, the profit per rug should be 50. The wholesalers cost of capital is 10 percent annually. The wholesaler estimates an ROI on the project of 50/250 or 20 percent. The residual income is estimated to be 50 (10% 250), or 25 per rug.

Question 1 What is wrong with the use of ROI and residual income in this analysis?