XWZ Division currently has an operating profit of $3.75 million on invested capital (operating

assets) of $21 million. XWZ is considering investing in two projects:

Project #1

Project #2

Operating Assets

$1,250,000

$ 750,000

Operating Income

$200,000

$175,000

XWZ's division manager receives a bonus each year which is tied to the ROI of XWZ.

Corporate headquarters at the A.N.City has made $2.5 million in capital available to XWZ. Any

unused funds would be invested at the corporate level at an expected rate of 10%.

Requirements:

a. Compute the ROI of each project.

b. Calculate the new ROI for XWZ Division based on all possible investment alternatives.

c. What investment option is XWZ's manager likely to choose?

d. Which investment alternative is in the best interest of the overall company? Why?

e. Calculate the residual income of each project (use 10% as the minimum return). Also

calculate the new Residual income for XWZ Division based on all possible investment

alternatives.

f. What investment option would XWZ choose if the division manager were evaluated based on

Residual Income?