Question

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 cond tioner 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 $29.9 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows: Outlay Operating income Required: 1. Compute the ROl for each investment project. Round to the nearest whole percent. Air conditioner, Ro Turbocharger, ROI 2. Compute the budgeted divisional ROt for each of the following four alternatives. Round to two decimal places. a. The air conditioner investment is made. b. The turbocharger investment is made c. Both investments are made. d. Neither addtional investment is made. 3. Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROt performance, which alternative do you think the divisional manager will choose? 1,150,000 $540,000 90,000 86,080 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 invesament is made. b. The turbocharger investment is made. c. Both investmenzs are made. d. Neither addrional investment s made. Which option will the manager choose based on residual incorme? s. Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 10%. Calculate the residual income for each of the ollowing 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, which is the most profitable?

Answer 1