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 $5.4 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

1. 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
   1. The air conditioner investment is made
   2. The turbocharger investment is made
   3. Both investments are made
   4. Neither additional investment is made

Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager willpick