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Return on Investment and Investment Decisions Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert. The budgeted income of the division was $725,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 12%. Round all numbers to two decimal places. Required: 1. Compute the ROI of the: a. division if the radio project is not undertaken. b. radio project alone. c. division if the radio project is undertaken. 2. Compute the residual income of the: a. division if the radio project is not undertaken. b. radio project alone. c. division if the radio project is undertaken. 3. CONCEPTUAL CONNECTION Do you suppose that Leslie will decide to invest in the new radio? Why or why not?

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773
BuyFind

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773

Solutions

Chapter
Section
Chapter 11, Problem 40P
Textbook Problem

Return on Investment and Investment Decisions

Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert.

The budgeted income of the division was $725,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 12%. Round all numbers to two decimal places.

Required:

  1. 1. Compute the ROI of the:
    1. a. division if the radio project is not undertaken.
    2. b. radio project alone.
    3. c. division if the radio project is undertaken.
  2. 2. Compute the residual income of the:
    1. a. division if the radio project is not undertaken.
    2. b. radio project alone.
    3. c. division if the radio project is undertaken.
  3. 3. CONCEPTUAL CONNECTION Do you suppose that Leslie will decide to invest in the new radio? Why or why not?

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Chapter 11 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making
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