The manager of the Alston Division of Stanford Manufacturing Corporation is currently producing a 20 percent return

Question:

The manager of the Alston Division of Stanford Manufacturing Corporation is currently producing a 20 percent return on invested capital. Stanford’s desired rate of return is 16 percent. The Alston Division has $6,000,000 of capital invested in operating assets and access to additional funds as needed. The manager is considering a new investment in operating assets that will require a $1,500,000 capital commitment and promises an 18 percent return.

Required

a. Would it be advantageous for Stanford Manufacturing Corporation if the Alston Division makes the investment under consideration?

b. What effect would the proposed investment have on the Alston Division’s return on investment?

Show computations.

c. What effect would the proposed investment have on the Alston Division’s residual income? Show computations.

d. Would return on investment or residual income be the better performance measure for the Alston Division’s manager? Explain.


Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Survey of Accounting

ISBN: 978-0073379555

2nd edition

Authors: Edmonds, old, Mcnair, Tsay

Question Posted: