Question

(Chapter 11) A company's current net operating income is $16,800 and its average operating assets are $80,000. The company's required rate of return is 18%. A new project being considered would require an investment of $15,000 and would generate annual net operating income of $3,000. What is the residual income of the new project? 20.8% O b 20% C. ($150) O d. $300 QUESTION 2 The use of return on investment (ROl) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole. True False QUESTION 3 A cost that differs between alternatives in a decision is: O 1. an avoidable Cost O 2. a differential cost O3. a relevant cost O 4. all of the above

Answer 1

1.Net Operating income from new project = $3,000

Less: Required Return on Assets 15,000*18% = $2,700

Residual Income = $300

Hence, the answer is d.

2. TRUE

ROI of a project is compared with the current ROI and not with the required rate of return or cost of capital. When a new project’s ROI is higher than the required return but lower than current ROI, the project will be rejected as per ROI while it would have been favourable for the company as a whole

3.4.All of the above

A cost that differs is known as relevant cost, differential cost, an avoidable cost