Capital Investments has three divisions. Each division's required rate of return is 15 percent. Planned operating results for 2011 are:
The company is planning an expansion requiring each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
a. Compute the current ROI for each division.
b. Compute the current residual income for each division.
c. Rank the divisions according to their current ROIs and residual incomes.
d. Determine the effects after adding the new project to each division's ROI and residual income.
e. Which Divisions are pleased with the addition and which ones are unhappy assuming the managers are evaluated on a combination of ROI and residual income? Is a combination of ROI and residual income appropriate for the divisions?

Question

Capital Investments has three divisions. Each division's required rate of return is 15 percent. Planned operating results for 2011 are:
  The company is planning an expansion requiring each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
a. Compute the current ROI for each division.
b. Compute the current residual income for each division.
c. Rank the divisions according to their current ROIs and residual incomes.
d. Determine the effects after adding the new project to each division's ROI and residual income.
e. Which Divisions are pleased with the addition and which ones are unhappy assuming the managers are evaluated on a combination of ROI and residual income? Is a combination of ROI and residual income appropriate for the divisions?

Quizplus · Accepted Answer

The Answer of Capital Investments has three divisions. Each division's required rate of return is 15 percent. Planned operating results for 2011 are:
  The company is planning an expansion requiring each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
a. Compute the current ROI for each division.
b. Compute the current residual income for each division.
c. Rank the divisions according to their current ROIs and residual incomes.
d. Determine the effects after adding the new project to each division's ROI and residual income.
e. Which Divisions are pleased with the addition and which ones are unhappy assuming the managers are evaluated on a combination of ROI and residual income? Is a combination of ROI and residual income appropriate for the divisions?

Capital Investments Has Three Divisions