The president feels very strongly that Mountain Sports should expand operations to a second location.She has even found a prime location in Canmore, Alberta, One of the great things about Canmore is its proximity to the mountains, ski-areas, hiking, biking and only about 10 minutes away from this beautiful, vibrant and internationally known Banff tourist town. Research indicates that the Canmore market is well suited to both cross-country skis and mountain bikes and that competition is fairly limited.

Performance Measurements: ROI, Residual (RI)

Management has provided the following income statement to the bank manager the expected net income in the next year.

Part A: (record responses below - show all calculations)

Using the above projected income statement, calculate the following performance measurements for the proposed Canmore expansion:

ROI, return on investment (Note: Average operating assets are $253,000)

RI, residual income (14% is considered an appropriate return)

Part B: (record responses below)

Analysis of Performance

1. Management is evaluated based on return on investment and is wondering if they should expand into Canmore.If the company's current return on investment is 23%, would management accept the new project (expansion into Canmore)?Why or why not?

V. Question 3 ROI, Residual Income (continued)

1. What is the major weakness of using return on investment as a performance measure?Explain your answer using case facts.

1. If management is evaluated based on residual income, would they be inclined to accept the project.Why or why not?