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Rains Nickless Ltd. Of Australia has two divisions that operate in Perth and Darwin. Selected data from last year on the two divisions is presented

Rains Nickless Ltd. Of Australia has two divisions that operate in Perth and

Darwin. Selected data from last year on the two divisions is presented below.

Perth

Darwin

Sales

$9,000

$20,000

Operating Income

$630

$1,300

Average Operating Assets

$3,000

$10,000

Average Total Assets

$4,300

$12,000

Required rate of return

18.0%

22.0%

Calculate the return on investment (ROA) for each

Perth

Darwin

division

ROA

Calculate the residual income (RI) for both

Perth

Darwin

divisions (6 points)

RI

Both divisions are considering a new line of products to sell to customers.

Data for the new project is given below.

Operating income

$195

New investment in operating assets

$1,000

The general manager of each division will accept the new project using

ROI if it increases his/her ROI from last year. Similarly, he/she will accept

the project using RI if it increases his/her RI from last year. (4 points)

Indicate with YES/NO below whether each manager will accept or reject

the new project for each decision criteria.

Decision

Perth

Darwin

ROA

RI

Criteria

Perth

Darwin

ROA (current)

Required rate of return (current)

ROA (new project)

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