RETURN ON INVESTMENT AND INVESTMENTDECISIONS
Leslie Blandings, division manager of Audiotech Inc., wasdebating the merits of a new product—a weather radio that would putout a warning if the county in which the listener lived were undera severe thunderstorm or tornado alert.
The budgeted income of the division was $725,000 with operatingassets of $3,625,000. The proposed investment would add income of$640,000 and would require an additional investment in equipment of$4,000,000. The minimum required return on investment for thecompany is 12 percent. Round all numbers to two decimal places.
Required:
1. Compute the ROl of:
a. The division if the radio project is not undertaken.
b. The radio project alone.
c. The division if the radio project is undertaken.
2. Compute the residual income of:
a. The division if the radio project is not undertaken.
b. The radio project alone.
c. The division if the radio project is undertaken
3. Do you suppose that Leslie will decide to invest in the newradio? Why or why not?
