Michael Limited has created a new division with four investment opportunities. The firm’s cost of capital is 20%.

The following additional information is available.

            Opportunity Income             Investment

A             $131 000                          $ 750 000

B             $162 000                          $ 600 000

C             $ 151 000                         $ 500 000

D             $148                                 $ 700 000

Required:

a) Calculate the Return on investment for each project. (6 Marks)

b) Assume you are the Project Manager and you are being evaluated based on Return On Investment (ROl), select the investment opportunities you would accept where the projects are mutually exclusive. Calculate the associated ROI for the division (2 Marks)

c) If, on the other hand, you were evaluated on Residual income (RI) basis, identify the investments you would accept. Calculate the Residual income for the division? (5 Marks)

d) Assuming you are the CEO of John Limited, identify which project you would want the division to accept. State the performance measure you would use to encourage this action. (2 Marks)