Wisconsin Division has operating income of $40,000 for the year ending December 31,2011.Average invested capital is $800,000 and the weighted-average cost of capital is 10%.The division is considering a new investment that would cost $800,000 and earn 7% annually.If return on investment is the performance metric,should the manager of the Wisconsin Division accept the new investment?
A) No, because the return on investment of the division decreases with the new investment.
B) No, because the return on investment of the division increases with the new investment.
C) Yes, because the return on investment of the division decreases with the new investment.
D) Yes, because the return on investment of the division increases with the new investment.

Question

Quizplus · Accepted Answer

The calculation of return on investment (ROI) is (Operating Income / Average Invested Capital) x 100. The current ROI for Wisconsin Division is (40,000 / 800,000) x 100 = 5%. The new investment would generate an annual income of 7% x 800,000 = 56,000. This would increase the operating income of the division to 96,000 (40,000 + 56,000). The new ROI would be (96,000 / 1,600,000) x 100 = 6%. Since the ROI increases with the new investment, the manager of Wisconsin Division should accept the new investment. Therefore, the correct answer is D.

Wisconsin Division Has Operating Income of $40,000 for the Year