Return on Investment and Investment Decisions
Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert.
The budgeted income of the division was $725,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 12%.
1. Compute the ROI of the following (round to the nearest whole percent):
a. The division if the radio project is not undertaken. %
b. The radio project alone. %
c. The division if the radio project is undertaken. %
2. Compute the residual income of the following:
a. The division if the radio project is not undertaken. $
b. The radio project alone. $
c. The division if the radio project is undertaken. $