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RETURN ON INVESTMENT AND INVESTMENT DECISIONS Leslie Blandings, division manager of Audiotech Inc., was debating the merits of...

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Accounting

RETURN ON INVESTMENT AND INVESTMENTDECISIONS

Leslie Blandings, division manager of Audiotech Inc., wasdebating the merits of a new product—a weather radio that would putout a warning if the county in which the listener lived were undera severe thunderstorm or tornado alert.

The budgeted income of the division was $725,000 with operatingassets 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 thecompany is 12 percent. Round all numbers to two decimal places.

Required:

1. Compute the ROl of:

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:

a. The division if the radio project is not undertaken.

b. The radio project alone.

c. The division if the radio project is undertaken

3. Do you suppose that Leslie will decide to invest in the newradio? Why or why not?

Answer & Explanation Solved by verified expert
4.2 Ratings (618 Votes)

Statement showing computations
Particulars a. The division if the radio project is not undertaken. b. The radio project alone. c. The division if the radio project is undertaken.
Budgeted Income                              725,000.00(A)                              640,000.00(A)                           1,365,000.00(A)
Operating Assets                           3,625,000.00(B)                           4,000,000.00(B)                           7,625,000.00(B)
1) Return on Investment = Income/Operating Assets 20.00%(A/B) 16.00%(A/B) 17.90%(A/B)
Required Income @12% of Operating assets                              435,000.00                              480,000.00                              915,000.00
2) Residual income = ROI- Required Income                              290,000.00                              160,000.00                              450,000.00

3.

ROI is greater if project is not undertaken

RI is greater if project is not undertaken

Hence,

             Leslie should not be accept the project if she decides based on ROI

    Therefore,

                    Leslie should be accept the project if she decides based on RI
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