Question
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:
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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started