A division with total assets of 200,000 currently earns a ROI of 10%. It can make an
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Question:
A division with total assets of £200,000 currently earns a ROI of 10%. It can make an additional investment of £20,000 for a 5 year life with nil residual value. The average operating income per annum from this investment would be £4,000. The division’s cost of capital is 11%.
Required
Compute and comment on the Return on Investment and the Residual Income, with and without the additional investment, and then advise the company whether it should make the additional investment.
Critique the relative advantages of ROI and RI for measuring divisional performance.
Expert Answer:
ANSWER IS lets calculate the Return on Investment ROI and Residual Income RI both with and without t... View the full answer
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