The manager of Stock Division projects the following for next year:

The manager can invest in an additional project that would require $40,000 investment in additional assets and would generate $6,000 of additional income.
-The company's minimum rate of return is 14%.Which of the following statements is true?

A) If the manager invests in the additional project, ROI of the division will decrease.
B) The residual income of the project is less than the residual income of the division without the project; therefore the project will be rejected.
C) Average investment for Stock Division will decrease if the project is accepted for investment.
D) If the manager invests in the additional project, residual income of the division will increase.
E) None of these.

Question

The manager of Stock Division projects the following for next year:

The manager can invest in an additional project that would require $40,000 investment in additional assets and would generate $6,000 of additional income.
-The company's minimum rate of return is 14%.Which of the following statements is true?

A) If the manager invests in the additional project, ROI of the division will decrease. 
B) The residual income of the project is less than the residual income of the division without the project; therefore the project will be rejected. 
C) Average investment for Stock Division will decrease if the project is accepted for investment. 
D) If the manager invests in the additional project, residual income of the division will increase. 
E) None of these.

Quizplus · Accepted Answer

The residual income is calculated as net operating income of the division minus a charge for the assets employed in the division. The minimum rate of return is 14%, and if the manager invests $40,000 in additional assets and it generates $6,000 of additional income, then the net operating income will increase. Therefore, residual income will increase if the manager invests in the additional project.

The Manager of Stock Division Projects the Following for Next