Center Media is made up of 3 divisions that operate as investment centers: Entertainment (DI), Telecommunications (TC) and Publication (PU). The DI division is the oldest of the divisions and consists mainly of a chain of newspapers, television and radio stations. The other two investment centers have been bought from other companies over the past five years. The TC division offers a low-cost long-distance calling service while the PU division manufactures photocopiers and printers. Table 1 contains information for 2016, which is the most recent fiscal year for Center Mdia.

Table 1

Centre Mdia

Data for the year 2019 (in thousands of $)

	Entertainment	Telecommunications	Publications
sales	120 000 $	200 000 $	160 000 $
Invested capital (total assets)	30 000	100 000	40 000
Net profit	6 000	18 000	3 600
Cost of capital required	15%	18%	12%

Questions to answer

1. Calculate the ROI (return on invested capital) for each of the investment centers in 2019.

2. Calculate the RNR (residual net income, also called residual profit) for each of the investment centers in 2019.

3. Suppose each investment center receives an investment opportunity that would generate an 18% return in 2019 on an investment of $ 10 million. If managers are evaluated and rewarded based on ROI, which one or which of them should accept the opportunity in question?

4. Suppose each investment center receives an investment opportunity that would generate a 2020 return of 18% on an investment of $ 10 million. If managers are evaluated and rewarded based on NRR (Residual Net Income), which one or which of them should accept the opportunity in question?

5. Is it fair and equitable to impose different costs of capital on different centers of investment? Comment.