Contrasting return on investment with residual income The Birmingham Division of Alabama Garage Doors, Inc., is currently achieving a 12 percent ROI. The company’s target ROI is 8 percent. The division has an opportunity to invest in operating assets an additional $900,000 at 10 percent but is reluctant to do so because its ROI will fall to 11.7 percent. The division’s present investment in operating assets is $4,500,000.
Required
Explain how management can use the residual income method to motivate the Birmingham Division to make the investment.