For several years, Northern Division of Marino Company has maintained a positive residual income. Northern is currently considering investing in a new project that will lower the division's overall return on investment (ROI) but increase its residual income. What is the relationship between the expected rate of return on the new project, the firm's cost of capital, and the division's current ROI?
A) The expected rate of return on the new project is higher than the division's current return on investment, but lower than the firm's cost of capital.
B) The firm's cost of capital is higher than the expected rate of return on the new project, but lower than the division's current return on investment.
C) The division's current return on investment is higher than the expected rate of return on the new project, but lower than the firm's cost of capital.
D) The expected rate of return on the new project is higher than the firm's cost of capital, but lower than the division's current return on investment.

Question

Quizplus · Accepted Answer

The new project increases residual income, indicating its return exceeds the firm's cost of capital. However, it lowers the division's overall ROI, suggesting the project's return is below the division's current ROI.

For Several Years, Northern Division of Marino Company Has Maintained