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4. Preston Ceramics, a division of Kerwin Corporation, has an operating income of $82,000 and total assets of $410,000. The required rate of return for the company is 12%. 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 Preston Ceramics has the opportunity to undertake a new project that will require an investment of $164,000. This investment would earn $21,320 for the company. Read the requirements? Requirement 1. What is the original return on investment (ROI) for Preston Ceramics (before making any additional investment)? First determine the formula to calculate the ROI. (1) (2) ROI (Enter the percentage to two decimal places.) The original return on investment (ROI) for Preston Ceramics is % Requirement 2. What would the ROI be for Preston Ceramics if this investment opportunity were undertaken? Would the manager of the Preston Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not? (Enter the percentage to two decimal places.) If this investment opportunity were undertaken, the ROI would be If the manager of this division is evaluated based on ROI she (3). want to make this investment. Investing in the new project would (4) the division's ROI. Requirement 3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Kerwin Corporation? Why or why not? (Enter the percentage to two decimal places.) The ROI of the investment opportunity is % From the standpoint of Kerwin Corporation this investment (5) desirable. The ROI of the investment opportunity (6). Kerwin's required rate of return. Requirement 4. What would the residual income (RI) be for Preston Ceramics if this investment opportunity were to be undertaken? Would the manager of the Preston Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? First determine the formula to calculate the RI. (7) (8) RI Let's begin by calculating the residual income (RI) for Preston Ceramics if the investment is not made. The residual income (RI) for Preston Ceramics if the additional investment is not made is (Use parentheses or a minus sign for a negative RI.) The residual income (RI) for Preston Ceramics if this investment opportunity were to be undertaken is If the manager of this division is evaluated based on RI she (10) want to make this investment. The (11) in Rl indicates that the division is earning (12). than management's expectations. Requirement 5. What is the Rl of the investment opportunity? Would the investment be desirable from the standpoint of Kerwin Corporation? Why or why not? (Use parentheses or a minus sign for a negative RI.) The Rl of the investment opportunity is meaning the investment opportunity would earn (15) than management's target required return From the standpoint of Kerwin Corporation this investment (13) desirable. The Rl of the investment opportunity is (14) Requirement 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why? Of the two performance measurement methods, ROI and RI, (16) is more likely to promote goal congruence. The Rl of the investment alone is (17) the division's RI by that amount. This would motivate both the division manager and the company management to (18) the investment. The arrival at the same conclusion by both the manager and company management (19) goal congruence. 2: Requirements 1. What is the original return on investment (ROI) for Preston Ceramics (before making any additional investment)? 2. What would the ROI be for Preston Ceramics if this investment opportunity were undertaken? Would the manager of the Preston Ceramics division want to make this investment 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 Kerwin Corporation? Why or why not? 4. What would the residual income (RI) be for Preston Ceramics if this investment opportunity were to be undertaken? Would the manager of the Preston 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 Kerwin Corporation? Why or why not? 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why? O Total current liabilities O Total current liabilities (3) O would O would not (4) O decrease increase (5) O is O is not (6) O is more than O is less than O Sales O Total assets O Sales O Total assets (1) O O Operating income O Sales Total assets (2) O 0 Operating income O Sales O Total assets (7) O O Capital turnover O Current liabilities O Operating income (8) O O Capital turnover O Current liabilities o Operating income (10) O would not O would (11) negative O positive (12) O more O less (13) O is not O is (14) O negative O positive (15) O less O more (16) ORI O ROI (17) negative, meaning the investment will decrease O positive, meaning the investment will increase (18) O make O not make (19) O does not indicate O indicates (9) O O Effective tax rate O Target rate of return O WACC 4. Preston Ceramics, a division of Kerwin Corporation, has an operating income of $82,000 and total assets of $410,000. The required rate of return for the company is 12%. 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 Preston Ceramics has the opportunity to undertake a new project that will require an investment of $164,000. This investment would earn $21,320 for the company. Read the requirements? Requirement 1. What is the original return on investment (ROI) for Preston Ceramics (before making any additional investment)? First determine the formula to calculate the ROI. (1) (2) ROI (Enter the percentage to two decimal places.) The original return on investment (ROI) for Preston Ceramics is % Requirement 2. What would the ROI be for Preston Ceramics if this investment opportunity were undertaken? Would the manager of the Preston Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not? (Enter the percentage to two decimal places.) If this investment opportunity were undertaken, the ROI would be If the manager of this division is evaluated based on ROI she (3). want to make this investment. Investing in the new project would (4) the division's ROI. Requirement 3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Kerwin Corporation? Why or why not? (Enter the percentage to two decimal places.) The ROI of the investment opportunity is % From the standpoint of Kerwin Corporation this investment (5) desirable. The ROI of the investment opportunity (6). Kerwin's required rate of return. Requirement 4. What would the residual income (RI) be for Preston Ceramics if this investment opportunity were to be undertaken? Would the manager of the Preston Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? First determine the formula to calculate the RI. (7) (8) RI Let's begin by calculating the residual income (RI) for Preston Ceramics if the investment is not made. The residual income (RI) for Preston Ceramics if the additional investment is not made is (Use parentheses or a minus sign for a negative RI.) The residual income (RI) for Preston Ceramics if this investment opportunity were to be undertaken is If the manager of this division is evaluated based on RI she (10) want to make this investment. The (11) in Rl indicates that the division is earning (12). than management's expectations. Requirement 5. What is the Rl of the investment opportunity? Would the investment be desirable from the standpoint of Kerwin Corporation? Why or why not? (Use parentheses or a minus sign for a negative RI.) The Rl of the investment opportunity is meaning the investment opportunity would earn (15) than management's target required return From the standpoint of Kerwin Corporation this investment (13) desirable. The Rl of the investment opportunity is (14) Requirement 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why? Of the two performance measurement methods, ROI and RI, (16) is more likely to promote goal congruence. The Rl of the investment alone is (17) the division's RI by that amount. This would motivate both the division manager and the company management to (18) the investment. The arrival at the same conclusion by both the manager and company management (19) goal congruence. 2: Requirements 1. What is the original return on investment (ROI) for Preston Ceramics (before making any additional investment)? 2. What would the ROI be for Preston Ceramics if this investment opportunity were undertaken? Would the manager of the Preston Ceramics division want to make this investment 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 Kerwin Corporation? Why or why not? 4. What would the residual income (RI) be for Preston Ceramics if this investment opportunity were to be undertaken? Would the manager of the Preston 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 Kerwin Corporation? Why or why not? 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why? O Total current liabilities O Total current liabilities (3) O would O would not (4) O decrease increase (5) O is O is not (6) O is more than O is less than O Sales O Total assets O Sales O Total assets (1) O O Operating income O Sales Total assets (2) O 0 Operating income O Sales O Total assets (7) O O Capital turnover O Current liabilities O Operating income (8) O O Capital turnover O Current liabilities o Operating income (10) O would not O would (11) negative O positive (12) O more O less (13) O is not O is (14) O negative O positive (15) O less O more (16) ORI O ROI (17) negative, meaning the investment will decrease O positive, meaning the investment will increase (18) O make O not make (19) O does not indicate O indicates (9) O O Effective tax rate O Target rate of return O WACC