Preston Ceramics, a division of LaChut Corporation, has an operating income of $$82,000$ and total assets of $$410,000.$ The required rate of return for the company is $9\%.$ 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.

Requirements

What is the original return on investment $($ROI$)$ for Preston Ceramics $($before making any

additional investment$)?$

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?

What is the ROI of the investment opportunity? Would the investment be desirable from the

standpoint of LaChut Corporation? Why or why not?

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?

What is the RI of the investment opportunity? Would the investment be desirable from the

standpoint of LaChut Corporation? Why or why not?

Which performance measurement method, ROI or RI$,$ promotes goal congruence? Why?