Division A is currently considering investing in a new project. The project is expected to generate a profit of $100,000 and requires an investment of $500,000. The imputed interest rate is 14%. The company has a strong focus on using Return on Investment (ROI) to measure the Divisions performance and to determine end of year bonuses. Details of the divisions anticipated profitability if they do not undertake the project is shown below:

Profit $264,000

Invested capital $1,200,000

Required:

a) Calculate the return on investment of Division A if they do not undertake the project (1 mark)

b) Calculate the return on investment of both the project and Division A overall if they decide to invest in the project. (2 marks)

c) If you were the division manager, would you undertake the project? Explain why. (2 marks)

d) Would undertaking the project be in the best interests of the company? Explain. (2 marks)

e) If the division managers performance was evaluated based on residual income, would they invest in the project? Show calculations of the residual income with and without the project. (3 marks)

f) Compare your recommendations based on ROI and RI above and explain if ROI or RI should be used in business acquisition decisions from a value maximization perspective. (2 marks)