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: 1. Compute the ROI for each investment project. 2. Compute the budgeted divisional ROI for each of the following four alternatives: a. The air conditioner investment is made. b. The turbocharger investment is made. c. Both investments are made. d. Neither additional investment is made. 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 rate of return equal to 14%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. b. The turbocharger investment is made. c. Both investments are made. d. Neither additional investment is made. Which option will the manager choose based on residual income? Explain. 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. b. The turbocharger investment is made. c. Both investments are made. d. Neither additional investment is made. Based on residual income, are the investments profitable? Why does your answer differ from your answer in Requirement 3?

BuyFind

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 42P
Textbook Problem

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:

Chapter 11, Problem 42P, Return on Investment for Multiple Investments, Residual Income The manager of a division that

(Note: Round all numbers to two decimal places.)

Required:

  1. 1. Compute the ROI for each investment project.
  2. 2. Compute the budgeted divisional ROI for each of the following four alternatives:
    1. a. The air conditioner investment is made.
    2. b. The turbocharger investment is made.
    3. c. Both investments are made.
    4. d. Neither additional investment is made.
  3. 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. 4. CONCEPTUAL CONNECTION Suppose that the company sets a minimum required rate of return equal to 14%. Calculate the residual income for each of the following four alternatives:
    1. a. The air conditioner investment is made.
    2. b. The turbocharger investment is made.
    3. c. Both investments are made.
    4. d. Neither additional investment is made.

Which option will the manager choose based on residual income? Explain.

  1. 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:
    1. a. The air conditioner investment is made.
    2. b. The turbocharger investment is made.
    3. c. Both investments are made.
    4. d. Neither additional investment is made.

Based on residual income, are the investments profitable? Why does your answer differ from your answer in Requirement 3?

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Chapter 11 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making
Ch. 11 - (Appendix 11A) Describe the four perspectives of...Ch. 11 - The practice of delegating authority to...Ch. 11 - Which of the following is not a reason for...Ch. 11 - A responsibility center in which a manager is...Ch. 11 - A responsibility center in which a manager is...Ch. 11 - If sales and average operating assets for Year 2...Ch. 11 - If sales and average operating assets for Year 2...Ch. 11 - The key difference between residual income and EVA...Ch. 11 - It ROI for a division is 15% and the company's...Ch. 11 - Use the following information for Multiple-Choice...Ch. 11 - Use the following information for Multiple-Choice...Ch. 11 - (Appendix 11A) Which of the following is a...Ch. 11 - (Appendix 11A) The length of time it takes to...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Burt Inc. has a number of divisions, including the...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Calculating Transfer Price Teslum Inc. has a...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Types of Responsibility Centers Consider each of...Ch. 11 - Margin, Turnover, Return on Investment Pelak...Ch. 11 - Margin, Turnover, Return on Investment, Average...Ch. 11 - Return on Investment, Margin, Turnover Data follow...Ch. 11 - Residual Income The Avila Division of Maldonado...Ch. 11 - Economic Value Added Falconer Company had net...Ch. 11 - Use the following information for Exercises 11-31...Ch. 11 - Use the following information for Exercises 11-31...Ch. 11 - Use the following information for Exercises 11-33...Ch. 11 - Use the following information for Exercises 11-33...Ch. 11 - Use the following information for Exercises 11-33...Ch. 11 - (Appendix 11A) Cycle Time and Velocity Prakesh...Ch. 11 - (Appendix 11A) Cycle Time and Velocity Lasker...Ch. 11 - (Appendix 11A) Manufacturing Cycle Efficiency...Ch. 11 - (Appendix 11A) Manufacturing Cycle Efficiency...Ch. 11 - Return on Investment and Investment Decisions...Ch. 11 - Return on Investment, Margin, Turnover Ready...Ch. 11 - Return on Investment for Multiple Investments,...Ch. 11 - Return on Investment and Economic Value Added...Ch. 11 - Transfer Pricing GreenWorld Inc. is a nursery...Ch. 11 - Setting Transfer PricesMarket Price versus Full...Ch. 11 - Full Cost-Plus Pricing and Negotiation Techno Inc....Ch. 11 - (Appendix 11A) Cycle Time, Velocity, Conversion...Ch. 11 - (Appendix 11A) Balanced Scorecard The following...Ch. 11 - (Appendix 11A) Cycle Time and Velocity,...Ch. 11 - Return on Investment Ethical Considerations Jason...

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