The management of Mullen Division has provided the following information:
Operating assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum desired rate of return is 10%. Should Mullen's management invest in the project if management is evaluated using residual income?
A) Yes, because the operating income is positive.
B) No, because the return on investment for the project is less than Mullen's current return on investment.
C) No, because the investment will lower Mullen's residual income.
D) Yes, because the project's return on investment exceeds the minimum desired rate of return.

Question

Quizplus · Accepted Answer

The project's return on investment (ROI) is calculated as $7,200 / $60,000 = 12%, which exceeds the minimum desired rate of return of 10%. Therefore, the project is financially viable based on the residual income evaluation method.

The Management of Mullen Division Has Provided the Following Information