Question
The Management of a large company is debating an investment. Management projects the investment will earn $100,000 annually. In addition, the investment will require the
The Management of a large company is debating an investment. Management projects the investment will earn $100,000 annually. In addition, the investment will require the company to purchase $600,000 in assets. Managements decision is summarized in the following chart:
|
| Before Investment | After Investment |
| Operating income | 600,000 | 700,000 |
| Average operating assets | 3,000,000 | 3,600,000 |
Required:
1. Assume Management is evaluated based on growth in the companys ROI. Compute the Return on Investment for the company before and after the investment. Would you recommend management make the investment?
2. Assume Management is evaluated based on growth in the companys residual income. The companys required rate of return is 15%. Compute the companys residual income before and after the investment. Would you recommend Gentry make the investment?
3. Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.
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Fundamental financial accounting concepts
Authors: Thomas P. Edmonds, Frances M. Mcnair, Philip R. Olds, Edward
8th edition
978-007802536, 9780077648831, 0078025362, 77648838, 978-0078025365
