Return on Investment and Investment Decisions

Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new producta weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert.

The budgeted income of the division was $875,000 with operating assets of $5,425,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 14%.

Required:

1. Compute the ROI of the following (round to the nearest whole percent):

a. The division if the radio project is not undertaken.	fill in the blank 1 %
b. The radio project alone.	fill in the blank 2 %
c. The division if the radio project is undertaken.	fill in the blank 3 %

2. Compute the residual income of the following:

a. The division if the radio project is not undertaken.	$fill in the blank 4
b. The radio project alone.	$fill in the blank 5
c. The division if the radio project is undertaken.	$fill in the blank 6

3. This depends on whether Leslies division is evaluated on the basis of ROI or on the basis of residual income. Overall division ROI wills___so if ROI is the basis for evaluation, she will ___the investment. On the other hand, residual income for the project is___and will overall residual income. If the division is evaluated on the basis of residual income, the project will be___