Kyler Ceramics, a division of Alderman Corporation, has an operating income of $85,000 and total assets of $425,000. The required rate of return for the company is 11%. 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 Kyler Ceramics has the opportunity to undertake a new project that will require an investment of $175,000. This investment would earn $24,500 for the company. Read the requirements. Requirement 1. What is the original return on investment (ROI) for Kyler Ceramics (before making any additional investment)? First determine the formula to calculate the ROI. Operating income Total assets ROI (Enter the percentage to two decimal places.) The original return on investment (ROI) for Kyler Ceramics is % Requirement 2. What would the ROI be for Kyler Ceramics if this investment opportunity were undertaken? Would the manager of the Kyler 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 want to make this investment. Investing in the new project would the division's ROI. Requirement 3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Alderman Corporation? Why or why not? (Enter the percentage to two decimal places.) The ROI of the investment opportunity is %. From the standpoint of Alderman Corporation this investment desirable. The ROI of the investment tunity Alderman's required rate of return Requirement 4. What would the residual income (RI) be for Kyler Ceramics if this investment opportunity were to be undertaken? Would the manager of the Kyler 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 Operating income (Total assets Target rate of return = RI Let's begin by calculating the residual income (RI) for Kyler Ceramics if the investment is not made The residual income (RI) for Kyler Ceramics if the additional investment is not made is (Use parentheses or a minus sign for a negative RI.) Requirement 5. What is the Rl of the investment opportunity? Would the investment be desirable from the standpoint of Alderman Corporation? Why or why not? (Use parentheses or a minus sign for a negative RI.) The Rl of the investment opportunity is From the standpoint of Alderman Corporation this investment desirable. The Rl of the investment opportunity is meaning the investment opportunity would earn than management's target required return. Requirement 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why? the division's RI by that amount. This would motivate both the division manager and the Of the two performance measurement methods, ROI and RI, is more likely to promote goal congruence. The Rl of the investment alone is company management to the investment. The arrival at the same conclusion by both the manager and company management goal congruence Choose from any list or enter any number in the input fields and then continue to the next
