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 $3,925,000. 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 15%.

Required:

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

a. The division if the radio project is not undertaken.	%
b. The radio project alone.	%
c. The division if the radio project is undertaken.	%

2. Compute the residual income of the following:

a. The division if the radio project is not undertaken.	$
b. The radio project alone.	$
c. The division if the radio project is undertaken.	$