In the past five years, Tam Burger has expanded to more than 200 stores, 80 percent of which are franchised. Two of the company-operated units, Eastwood and Marsfield, are among the fastest-growing stores. Both are considering expanding their menus to include pizza, which should increase the profit of each store by $36,000. Purchase and installation of the necessary equipment for this project will cost $200,000 per store. Tam Burger evaluates its managers based on return on investment. Managers of individual stores have decision rights over the pizza expansion project.

The following data relate to the most recent year of operations:

	Eastwood	Marsfield
Revenues	$ 1,100,000	$ 1,720,000
Expenses	920,000	1,490,000
Invested capital	890,000	1,640,000

Required:

1. Calculate the return on investment (ROI) for the pizza project and the current return on investment for each store. Will the store managers choose to undertake the pizza project? (4 marks)

2. Assuming that Tam Burgers required rate of return is 15%, calculate the residual income for the pizza project and the current residual income for each store. If residual income is used to evaluate the performance of the stores, will the store managers choose to undertake the pizza project? (4 marks)

3. Outline two limitations of using ROI to evaluate the performance of the stores. Which of these limitations can be overcome by using residual income? Use the results from parts 1 and 2 to illustrate your answer. (3 marks)