The wholesale department of Rosehill Company currently earns an ROI of 15%. The department manager is considering a new project, which requires a $100,000 investment in operating assets and generates a net operating income of $13,500. Assume that the company’s minimum required rate of return is 12%. Which of the following statement is true?

 

Multiple Choice

• If the manager is evaluated based on ROI, she will make the new investment because it increases the department’s ROI by 1.5%.

• If the manager is evaluated based on ROI, she will make the new investment because it generates an ROI that is 1.5% greater than the company’s minimum required rate of return.

• If the manager is evaluated based on residual income, she will not make the new investment because it decreases the department’s residual income by $1,500.

• If the manager is evaluated based on residual income, she will make the new investment because it increases the department’s residual income by $1,500.