The Imaging Division is an investment center of Medical Diagnostics Company. The Imaging Division currently has total assets of $300,000, total sales of $900,000 and 18% return on investment per year.

Managers of the Imaging Division have an opportunity to invest $120,000 in a new product line that can generate additional income of $18,000 per year. Medical Diagnostics uses 13% as a minimum rate of return.

a. Calculate the amount of net income generated from the Imaging Division before making an investment in the new product line.

Ans: $___________________

b. Calculate the return on investment from the Imaging Division if the new product line has been added.

Ans: _________________% (round your answer to the nearest integral if necessary, e.g., 8%)

c. If the Imaging Division is evaluated based on return on investment, will the managers add the new product line?

Yes No (circle one)

Why?

d. How much residual income will result from the investment in the new product line?

Ans: $___________________

e. If the Imaging Division is evaluated based on residual income, will the managers add the new product line?

Yes No (circle one)

Why?