Gamma Division
The manager of Gamma Division projects the following for next year: $$\begin{array} { l l }
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$$ The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
-Refer to Gamma Division . What will happen to the company if the manager invests in the additional project?
A) ROI of the division will increase.
B) Average investment for will decrease.
C) Residual income of the division will increase.
D) There will be no impact on ROI or residual income.

Question

Gamma Division
The manager of Gamma Division projects the following for next year: $$\begin{array} { l l } 
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$$ The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
-Refer to Gamma Division . What will happen to the company if the manager invests in the additional project?
A) ROI of the division will increase.
B) Average investment for will decrease.
C) Residual income of the division will increase.
D) There will be no impact on ROI or residual income.

Quizplus · Accepted Answer

The additional project generates a return of $4,200 on a $30,000 investment, which is a 14% return. Since this is above the company's minimum rate of return of 12%, the residual income will increase.