Question

The East Cobb Division of Georgia 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 $750,000 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 $4,000,000.

Required
Explain how management can use the residual income method to motivate the East Cobb Division to make the investment.



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  • CreatedFebruary 07, 2014
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