Assume Magnificent Modems (MM) is a division of Gilmore Business Products (GBP). GBP uses ROI as the primary measure of managerial performance. GBP has a desired return on investment (ROI) of 3 percent. The company has $100,000 of investment funds to be assigned to its divisions. The president of MM is aware of an investment opportunity for these funds that is expected to yield an ROI of 3.5 percent.
Required
a. Explain why you believe the president of MM will accept or reject the $100,000 investment opportunity. Support your answer by calculating MM’s existing ROI. Base your computation on the information contained in the income statement and balance sheet that you prepared in Chapter 1 (page 52).
b. Name the term used to describe the condition that exists in Requirement a. Provide a brief definition of this term.
c. If GBP changes its performance measurement criteria from ROI to residual income (RI), will the new evaluation approach affect the President’s decision to accept or reject the $100,000 investment opportunity? Support your answer by calculating MM’s residual income for the investment opportunity.