The manager of a division that produces kitchen appliances is considering the opportunity to invest...
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Accounting
The manager of a division that produces kitchen appliances is considering the opportunity to invest in two independent projects. The first is a toaster and the second is a blender. Without the investments, the division will have total assets for the coming year of $14.5 million and after-tax income of $1.58 million. The invested capital required for each investment and the expected operating incomes are as follows: Toaster Blender After-tax operating income $33,750 $44,850 Invested capital 375,000 345,000 Corporate headquarters will obtain its financing for the kitchen appliances divisions further investments from long term debt and shares and the weighted average cost of capital is estimated to be 9 per cent. Required: Compute ROI for each investment project (2 marks) Compute the budgeted divisional ROI for each of the following alternatives: a. The toaster investment is made b. The blender investment is made c. Both investment are made d. Neither investment is made Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?
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