An Italian wholesaler of Mexican crafts is considering the importing of rugs. The rugs are hand-woven in southern Mexico and use natural dyes. The rugs cost an average of

€250 including transportation and handling. The wholesaler plans to sell them in Italy for €300. Therefore, the profit per rug should be €50. The wholesaler’s cost of capital is 10 percent annually. The wholesaler estimates an ROI on the project of €50/€250, or 20 percent. The residual income is estimated to be €50 – (10% × €250), or €25 per rug.

What is wrong with the use of ROI and residual income in this analysis?