The overall sales and operating data for two different companies are given below:
Company A    Company B
Sales                                               $ 6,000,000    $ 8,000,000
Average Operating Assets                 $ 1,500,000    $ 2,000,000
Net Operating Profit                             $ 400,000       $ 200,000
Stockholders' Equity                          $ 1,000,000    $ 1,500,000
Each firm's minimum rate of return             14 %            12 %
(or Their Respective Cost of Capital)
REQUIRED:
a) Compute the overall ROI for each company.
b) Compute the overall Residual Income for each company.
c) Assume that Company A is presented with an investment opportunity that would require an initial investment in additional operating assets of $100,000 and would yield a ROI and an Internal Rate of Return of 15 %:
--If performance is being measured by ROI would Company A be likely to accept the opportunity? Reject? Why?
--If performance is being measured by residual income, would Company A be likely to accept the opportunity? Reject? Why?
d) Assume that Company B is presented with an investment opportunity that would require an initial investment in additional operating assets of $100,000 and would yield a ROI and an Internal Rate of Return of 15 %:
--If performance is being measured by ROI would Company B be likely to accept the opportunity? Reject? Why?
--If performance is being measured by residual income, would Company B be likely to accept the opportunity? Reject? Why?