Stenback Ceramics, a division of Bentfield Corporation, has an operating income of $85,000 and total assets of $425,000. The required rate of retum for the company is 12%. The company is evaluating whether it should use retum on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of Stenback Ceramics has the opportunity to undertake a new project that will require an investment of $175,000. This investment would eam $24,500 for the company. Read the requirements Requirement 1. What is the original return on investment (ROI) for Stenback Ceramics (before making any additional investment)? First determine the formula to calculate the ROI. Operating income Total assets ROI (Enter the percentage to two decimal places.) The original return on investment (ROI) for Stenback Ceramics is % Requirements 1. What is the original return on investment (ROI) for Stenback Ceramics (before making any additional Investment)? 2. What would the ROI be for Stenback Ceramics if this investment opportunity were undertaken? Would the manager of the Stenback Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not? 3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Bentfield Corporation? Why or why not? 4. What would the residual income (RI) be for Stenback Ceramics if this investment opportunity were to be undertaken? Would the manager of the Stenback Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? 5. What is the Rl of the investment opportunity? Would the Investment be desirable from the standpoint of Bentfield Corporation? Why or why not? 6. Which performance measurement method, ROI or RI, promotes goal congruence? Why? Print Done Requirement 1. What is the original return on investment (ROI) for Cleary Ceramics (before making any additional investment)? First determine the formula to calculate the ROI Operating income Total assets ROI (Enter the percentage to two decimal places) The original return on investment (ROI) for Cleary Ceramics is Requirement 2. What would the ROI be for Cleary Ceramics if this investment opportunity were undertaken? Would the manager of the Cleary Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not? (Enter the percentage to two decimal places.) If this investment opportunity were undertaken the ROI would bo If the manager of this division is evaluated based on ROI she would not want to make this investment. Investing in the new project would docrease the division's ROI Requirement 3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Alderman Corporation? Why or why not? (Enter the percentage to two decimal places.) The ROI of the investment opportunity is desirable. The ROI of the investment opportunity From the standpoint of Alderman Corporation this investment is is more than Alderman's required rate of return Requirement 4. What would the residual income (RI) be for Cleary Ceramics if this investment opportunity were to be undertaken? Would the manager of the Cleary Ceramics division want to make this investment if she were evaluated based on Ri? Why or why not? First determine the formula to calculate the Ri. Operating income Total assets Target rate of return RI Let's begin by calculating the residual income (RI) for Cleary Ceramics if the investment is not made The residual income (RI) for Cleary Ceramics if the additional investment is not made is (Use parentheses or a minus sign for a negative RI.) The residual income (RI) for Cleary Ceramics if this investment opportunity were to be undertaken is If the manager of this division is evaluated based on RI she would want to make this investment. The positive in RI indicates that the division is earning more than management's expectations Requirement 5. What is the Rl of the investment opportunity? Would the investment be desirable from the standpoint of Alderman Corporation? Why or why not? (Use parentheses or a minus sign for a negative RI) The Rl of the investment opportunity is From the standpoint of Alderman Corporation this investment is desirable. The Rl of the investment opportunity is positive meaning the investment opportunity would earn more than management's target required return Requirement 6. Which performance measurement method, ROI or Rl, promotes goal congruence? Why? of the two performance measurement methods ROI and RI, RI is more likely to promote goal congruence The Rl of the investment alone is positive, meaning the investment will increase the division's RI by that amount. This would motivate both the division manager and the company management to make the investment. The arrival at the same conclusion by both the manager and company management indicates goal congruence
