Sukses Company is the manufacturer of vehicle accessories and has several divisions.    Internal Accessories Division has the opportunity to invest in two projects for the coming year. The required investment and the operating income for each project, are as follows: 

 

	Project I (RM)	Project II (RM)
Investment	10,000,000	4,000,000
Operating income	1,300,000	640,000

 

The division currently earns Return on Investment (ROI) of 15 percent, with operating assets of RM50 million and operating income on current investments of RM7.5 million. The division has received approval from the Company's management to utilize up to RM15 million in new investment.   The divisional manager has four alternatives: 

1. invest in Project I, 
2. invest in Project II, 
3. invest in both Projects I and II, or  (4) invest in neither project. 

The management requires that all investments earn at least 10 percent, as this rate represents the cost of acquiring the capital. Any capital not used by Internal Accessories Division is invested by Headquarters, with 10 percent return. 

 

Required: 

 

a) Calculate the ROI for the division under each alternative.  If the performance of the divisional manager is measured based on ROI, which alternative would the manager of Internal Accessories Division choose? 

b) In your opinion, based on ROI in (i), which alternative is the best option for the Company? Why? 

c) Calculate the Residual Income (RI) for Project I and Project II. If the performance of the divisional manager is measured based on RI, which alternative would the divisional manager choose? 

d) Explain two (2) advantages of ROI and two (2) advantages of RI.

Answer rating: 100% (QA)

a To calculate the ROI for each alternative we need to consider the operating income and operating assets for each project ROI Operating Income Operating Assets 1 Investing in Project I ROI for Projec... View the full answer