Return on Investment for Multiple Investments, Residual Income
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 $28.9 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows:
(Note: Round all numbers to two decimal places.)
Required:
Which option will the manager choose based on residual income? Explain.
Based on residual income, are the investments profitable? Why does your answer differ from your answer in Requirement 3?
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