The manager of a division that produces add$-$on products for the automobile industry had just been presented the opportunity to invest in two independent projects.

The first is an air conditioner for 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 $$36$ million and expected operating income of $$5\mathrm{.}4$ million.

The outlay required for each investment and the expected operating incomes are as follows:

Air Conditioner Turbocharger

Outlay $$800,000$ $$550,000$

Operating income $$104,000$ $$85,250$

Required:

NOTE: Please show supporting calculations for each step

a$.$ Calculate the ROI for each of the two new projects

b$.$ Compute the budgeted divisional ROI for each of the following four alternatives

i$.$ The air conditioner investment is made

ii$.$ The turbocharger investment is made

iii. Both investments are made

iv$.$ Neither additional investment is made

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

d$.$ 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

i$.$ The air conditioner investment is made

ii$.$ The turbocharger investment is made

iii. Both investments are made

iv$.$ Neither additional investment is made

e$.$ Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose?

f$.$ 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

i$.$ The air conditioner investment is made

ii$.$ The turbocharger investment is made

iii. Both investments are made

iv$.$ Neither additional investment is made

g$.$ Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose?