Return on Investment for Multiple Investments, Residual Income

The manager of a division that produces add$-$on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $$29\mathrm{.}9$ million and expected operating income of $$4\mathrm{.}335$ million. The outlay required for each investment and the expected operating incomes are as follows:

Line Item Description Air Conditioner Turbocharger

Outlay $$850,000$ $$540,000$

Operating income $90,000110,080$

Required:

$1.$ Compute the ROI for each investment project. Round to the nearest whole percent.

Air conditioner, ROI fill in the blank $1$ of $2$

$11$

$\%$

Turbocharger, ROI fill in the blank $2$ of $2$

$20$

$\%$

$2.$ Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places.

Line Item Description Answer

a$.$ The air conditioner investment is made. fill in the blank $3$

$14\mathrm{.}39$

$\%$

b$.$ The turbocharger investment is made. fill in the blank $4$

$14\mathrm{.}60$

$\%$

c$.$ Both investments are made. fill in the blank $5$

$14\mathrm{.}49$

$\%$

d$.$ Neither additional investment is made. fill in the blank $6$

$14\mathrm{.}50$

$\%$

$3.$ Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?

The manager will choose the turbocharger, but not the air conditioner.

$4.$ Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to $14\%.$ Calculate the residual income for each of the following four alternatives:

Line Item Description Amount

a$.$ The air conditioner investment is made. $fill in the blank $8$

$239,000$

b$.$ The turbocharger investment is made. $fill in the blank $9$

c$.$ Both investments are made. $fill in the blank $10$

d$.$ Neither additional investment is made. $fill in the blank $11$

$149,000$

Which option will the manager choose based on residual income?

The turbocharger

$5.$ Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to $10\%.$ Calculate the residual income for each of the following four alternatives:

Line Item Description Amount

a$.$ The air conditioner investment is made. $fill in the blank $13$

b$.$ The turbocharger investment is made. $fill in the blank $14$

c$.$ Both investments are made. $fill in the blank $15$

d$.$ Neither additional investment is made. $fill in the blank $16$

$1,345,000$

Based on residual income, which is the most profitable?

Both investmentsConceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance,

which alternative do you think the divisional manager will choose?

The manager will choose the turbocharger, but not the air conditioner. $$

Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to $14\%.$ Calculate the

residual income for each of the following four alternatives:

a$.$ The air conditioner investment is made.

b$.$ The turbocharger investment is made.

c$.$ Both investments are made.

d$.$ Neither additional investment is made.

Which option will the manager choose based on residual income?

The turbocharger $$

Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to $10\%.$ Calculate the

residual income for each of the following four alternatives:

a$.$ The air conditioner investment is made.

b$.$ The turbocharger investment is made.

c$.$ Both investments are made.

d$.$ Neither additional investment is made.

Based on residual income, which is the most profitable?Return on Investment for Multiple Investments, Residual Income

The manager of a division that produces add$-$on products for the automobile industry has just been presented the opportunity to

invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a

turbocharger. Without the investments, the division will have average assets for the coming year of $$29\mathrm{.}9$ million and expected

operating income of $$4\mathrm{.}335$ million. The outlay required for each investment and the expected operating incomes are as follows:

Required:

Compute the ROI for each investment project. Round to the nearest whole percent.

Air conditioner, ROI

$\%$

Turbocharger, ROI

$\%$

Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places.

a$.$ The air conditioner investment is made.

$\%$

b$.$ The turbocharger investment is made.

$\%$

c$.$ Both investments are made.

d$.$ Neither additional investment is made.