Comparing return on investment with residual income
The Wade Division of Geisler Corporation has a current ROI of 20 percent. The company target ROI is 15 percent. The Wade Division has an opportunity to invest $5,000,000 at 18 percent but is reluctant to do so because its ROI will fall to 19.2 percent. The present investment base for the division is $7,500,000.
Required
Demonstrate how Geisler can motivate the Wade Division to make the investment by using the residual income method.
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