The division manager of HFD Inc., was debating the merits of a new product$$a toy drone with a flying radius of $25$ feet.

The budgeted income of the division was $$849,200$ with operating assets of $$3,860,000.$ The proposed investment would add income of $$360,000$ and would require an additional investment in equipment of $$2,000,000.$ The minimum required return on investment for the company is $13\%.$

Required:

Download Excel spreadsheet

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

Line Item Description Answer

a$.$ The division if the drone project is not undertaken. fill in the blank $1$

$\%$

b$.$ The drone project alone. fill in the blank $2$

$\%$

c$.$ The division if the drone project is undertaken. fill in the blank $3$

$\%$

$2.$ Compute the residual income of the following:

Line Item Description Amount

a$.$ The division if the drone project is not undertaken. $fill in the blank $4$

b$.$ The drone project alone. $fill in the blank $5$

c$.$ The division if the drone project is undertaken. $fill in the blank $6$

$3.$ This depends on whether division is evaluated on the basis of ROI or on the basis of residual income. Overall division ROI will fill in the blank $1$ of $5$

decrease

; so if ROI is the basis for evaluation, the division manager will fill in the blank $2$ of $5$

decline

the investment. On the other hand, residual income for the project is fill in the blank $3$ of $5$

positive

and will fill in the blank $4$ of $5$

raise

overall residual income. If the division is evaluated on the basis of residual income, the project will be fill in the blank $5$ of $5$

accepted

$.$

$4.$ How would you reconcile the seemingly opposing results using ROI and residual income?

Aside from divisional performance and management evaluations, firms

may

have disparate goals

depending

on many factors including industry, corporate objectives, shareholder and market expectations, position of the product in the product life cycle and so on$.$