Kitchen Appliances, Inc., is a multi-division company with each major product line managed by a separate division. Divisional managers have complete autonomy with respect to operating and investment decisions. The company evaluates its division managers on ROI, calculated as operating income before taxes divided by net book value of assets (averaged over the year). The firm pays particular attention to year-over-year growth in ROI as well as budget-actual comparison of the measure.
Wendy Miller is the manager of the dishwasher division. Wendy expects that the operating income for the current year will be $2,400,000 before taxes. Given a net asset base of $6,800,000, the division€™s ROI would be a healthy 35%, well above the average return from other divisions. This performance has been fairly representative of the way things have been going for Wendy. She expects a similar performance next year as well and is looking forward to her promotion into the C-suite (the corporate office).
Toward the end of the current year, an investment opportunity arises for Wendy€”the possibility of introducing a new dishwasher model with improved features. The following table presents some salient financial information that Wendy€™s managers put together for her evaluation:

The company uses a straight-line depreciation method for accounting and tax purposes.

Required:
a. Does the investment opportunity have a positive net present value? From the company€™s viewpoint, should the project be accepted?
b. Will Wendy accept the project? Make a recommendation after calculating her ROI with and without the investment. Assume that investment occurs at the start of the year.
c. Assume that the company evaluates its divisional managers based on residual income, using a 12% required rate of return. What is the dishwasher division€™s expected residual income for the current year (without the proposed investment)? With the proposed project?
d. Comment on why ROI and RI might lead to differing incentives regarding projectinvestments.

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Incremental cash outlay for additional equipment Useful life Salvage value at the end of useful life Annual revenues Annual variable costs Annual fixed costs (exchding depreciation) Required rate of return (company sipulated) Corporate tax ratc S1.500,000 10 years 800,000 300,000 100,000 12% 3000