The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $29.4 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows:
The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $29.4 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows:
| Air conditioner | Turbocharger | |||
| Outlay | $850,000 | $540,000 | ||
| Operating income | 90,000 | 98,080 |
Required:
1. Compute the
| Air conditioner, ROI | fill in the blank 1 % |
| Turbocharger, ROI | fill in the blank 2 % |
2. Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places.
| a. The air conditioner investment is made. | fill in the blank 3 % |
| b. The turbocharger investment is made. | fill in the blank 4 % |
| c. Both investments are made. | fill in the blank 5 % |
| d. Neither additional investment is made. | fill in the blank 6 % |
3. Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?
4. Conceptual Connection: Suppose that the company sets a minimum required
| a. The air conditioner investment is made. | $fill in the blank 8 |
| b. The turbocharger investment is made. | $fill in the blank 9 |
| c. Both investments are made. | $fill in the blank 10 |
| d. Neither additional investment is made. | $fill in the blank 11 |
Which option will the manager choose based on residual income?
5. Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 10%. Calculate the residual income for each of the following four alternatives:
| a. The air conditioner investment is made. | $fill in the blank 13 |
| b. The turbocharger investment is made. | $fill in the blank 14 |
| c. Both investments are made. | $fill in the blank 15 |
| d. Neither additional investment is made. | $fill in the blank 16 |
Based on residual income, which is the most profitable?
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