Question: Generic Motors Corporation has two divisions, Kadillack and Chevrolay. Their performance for last year is as follows.
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Kadillack
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Chevrolay
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Investment (operating assets)
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$100 million
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$400 million
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Profit
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$18 million
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$56 million
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The required rate of return (cost of capital) for Generic Motors is 10% a year.
Required:
a) What is the return on investment (ROI) for each division?
b) What is the residual income (RI) for each division?
c) Which of the two measures (ROI or RI) would you use to decide which division performs better? Briefly explain your reasons.