Ceramics, a division of

Gammaro

Corporation, has an operating income of

$78,000

and total assets of

$416,000.

The required rate of return for the company is

10%.

The company is evaluating whether it should use return on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of

McKnight

Ceramics has the opportunity to undertake a new project that will require an investment of

$104,000.

This investment would earn

$15,600

for the company.Read the requirements

LOADING...

.

Question content area bottom

Part 1

Requirement 1. What is the original return on investment (ROI) for

McKnight

Ceramics (before making any additional investment)?

First determine the formula to calculate the ROI.

=

ROI

Requirements 1. What is the original return on investment (ROI) for McKnight Ceramics (before making any additional investment)? 2. What would the ROI be for McKnight Ceramics if this investment opportunity were undertaken? Would the manager of the McKnight Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not? 3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Gammaro Corporation? Why or why not? 4. What would the residual income (RI) be for McKnight Ceramics if this investment opportunity were to be undertaken? Would the manager of the McKnight Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? 5. What is the Rl of the investment opportunity? Would the investment be desirable from the standpoint of Gammaro Corporation? Why or why not? 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why