The Seaton Company has two divisions the Wood Floor Division and the Tile Floor Division. Management of both divisions have been presented with the opportunity to invest in equipment that could be used to produce vinyl plank flooring.

The equipment would cost $1,000,000 dollars and would incur $200,000 worth of depreciation next year. Income associated with the production of the vinyl plank flooring is estimated to be $150,000.

Management of both divisions are evaluated based on their ability to improve Divisional ROI. Summary budgeted financial information for the two divisions for next year is presented below. This information does not include any projections related to the possible equipment acquisition and potential addition of the vinyl plank flooring line.

Division	Sales	Income	Beginning of Year NBV of Div Asset	Next year’s Depreciation	End of year NBV of Divisional Assets
Wood Floor	$6,750,000	$475,000	$2,500,000	$500,000	$2,000,000
Tile Floor	$12,400,000	$800,000	$6,000,000	$1,000,000	$5,000,000

1. Calculate next years projected ROI for each division using average net book value of assets.

2. Which, if either, both, or neither Division Manager is/are likely to want the project. Show supporting calculations and explain the rationale for your conclusion.

3. If management performance is evaluated based on Residual Income instead of ROI and the company has a 15% target ROI would either manager be likely to change their decision about the project? Provide the rationale that supports your answer.

4. Is this project clearly acceptable if Seaton Company wants its managers to make decisions that increase the wealth of the firm? Explain the rationale that supports your answer.