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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

  1. 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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