Question
QUESTION 34 The following data pertain to the Belt Division of Allen Corp: Average operating assets $400,000 Net operating income $80,000 Minimum required rate of
QUESTION 34
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The following data pertain to the Belt Division of Allen Corp:
Average operating assets
$400,000
Net operating income
$80,000
Minimum required rate of return
15%
Current ROI
20%
The division is evaluated on the basis of residual income. The division is considering a new project that requires a $100,000 investment in operating assets. The project alone will generate $18,000 net operating income (that is 18% ROI).
Which of the following is true?
A. The division should reject the project. If rejected, the division's residual income will become $25,000.
B. The division should accept the project. If accepted, the division's residual income will become $23,000.
C. The division should accept the project. If accepted, the division's residual income will become $15,000.
D. The division should reject the project. If rejected, the division's residual income will become $19,000.
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