The manager of Gamma Division projects the following for next year:
The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
$\begin{array}{ll}
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$
-Refer to the Figure.What will happen to Gamma Division if the manager invests in the additional project?
A)If the manager invests in the additional project, ROI of the division will increase.
B)If the manager uses ROI to decide to invest, residual income of the project is less than the residual income of the division without the project; therefore, the project will be rejected.
C)If the manager invests in the project, average investment for Alpha Division will decrease.
D)If the manager invests in the additional project, residual income of the division will increase.

Question

The manager of Gamma Division projects the following for next year:
The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
 $\begin{array}{ll}
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$
-Refer to the Figure.What will happen to Gamma Division if the manager invests in the additional project?
A)If the manager invests in the additional project, ROI of the division will increase.
B)If the manager uses ROI to decide to invest, residual income of the project is less than the residual income of the division without the project; therefore, the project will be rejected.
C)If the manager invests in the project, average investment for Alpha Division will decrease.
D)If the manager invests in the additional project, residual income of the division will increase.

Quizplus · Accepted Answer

The additional project generates $4,200 income on a $30,000 investment, which is a 14% return. Since this is above the company's minimum rate of return of 12%, the residual income will increase.