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

XWZs 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%.

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 XWZs manager likely to choose? What are you assuming is motivating the manager? What other motivations should we consider?

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?

g. How might the performance/reward structure be revised to better align division and corporate goals?