Patel Corporation is a Canadian company that manufactures electric components and has a very successful Division located in Eastern Canada. This Division is considered to be an investment center for purposes of managerial evaluation.

Patel uses ROI as a performance measure in all its Divisions and management bonuses are based on ROI. All investments in operating assets are expected to earn a minimum return of 14%. Patels historical ROI has averaged a company wide ROI of 16.5%

The most recent income statement for the Eastern Canadian Division is given below. The division's Average Operating Assets employed were $18,000,000.

Eastern Canadian Division

Divisional Income Statement

For the Year Ended May 31, 2021

Sales $43,200,000

Cost of goods sold 31,800,000

Gross Margin 11,400,000

Less operating expenses:

Selling expenses $ 5,700,000

Administrative expenses 1,920,000 7,620,000

Net operating income $ 3,780,000

The Eastern Canadian Division is currently considering an investment opportunity that proposes the following amounts:

Sales $4,000,000

Operating Expenses $3,400,000

Investment Required $3,500,000

Required:

1. Calculate the following performance measures as of May 31, 2021 for The Eastern Canadian Division:

(a) ROI.

(b) Residual income

2. Calculate the ROI on the Investment opportunity

1. Will the management of the Eastern Canadian Division accept the investment opportunity?

If residual income were used as a performance measure instead of ROI, would the Eastern Canadian Division accept? Explain.