F-C Fans sells several types of commercial and industrial fans such as exhaust fans, evaporative coolers, and agricultural fans. Currently, the company uses Return on Investment (ROI) to evaluate the performance of its district managers. The Western District’s current ROI has been calculated as follows:

ROI = $ 720,000 = 12%
$6,000,000

The manager of the Western District has the opportunity to increase NOI by $200,000 per year by investing in new state-of-the-art equipment at a cost of $2,500,000. The Company's minimum rate of return is 7.5%.

REQUIRED (Be sure to complete each step and show ALL of your work for full credit):

(1) 

1. (a) Using the ROI formula, calculate the ROI of investing in the new equipment (the investment).
2. (b) Compare the ROI of the investment to the company’s minimum rate of return. Based on this comparison, would the company want the Western District manager to make the investment? Explain your answer.
3. 
   
4. (2) 
5. (a) Add the investment’s NOI ($200,000) to the District’s current NOI. Add the investment’s cost ($2,500,000) to the District’s current cost. Use these revised dollar amounts to re-calculate the District’s ROI (round to the nearest percent).
6. (b) Compare the District’s ROI without the investment to the ROI with the investment. If the company evaluates managers based on ROI, will the manager make the investment? Explain your answer.
7. 
   
8. (3) 
9. (a) Calculate the Western District’s current residual income.
10. (b) Using the revised investment and cost dollar amounts calculated in part (2)(a), re-calculate the District’s residual income.
11. (c) Compare the District’s residual income without the investment to the residual income with the investment. If the company evaluates managers based on residual income, will the manager make the investment? Explain your answer.

(4) Define goal congruence. Based on your analyzes above, which performance method (ROI or residual income) would achieve goal congruence between the company and the manager?
Explain your answer.

Answer rating: 100% (QA)

1 a ROI of investing in the new equipment the investment ROI Net Operating Income Investment Cost Investment Cost ROI 200000 2500000 2500000 ROI 092 o... View the full answer