RETURN ON INVESTMENT AND INVESTMENT DECISIONS Leslie Blandings, division manager of Audiotech Inc., was debating the merits of...

4.2 Ratings (618 Votes)

Statement showing computations
Particulars	a. The division if the radio project is not undertaken.	b. The radio project alone.	c. The division if the radio project is undertaken.
Budgeted Income	725,000.00(A)	640,000.00(A)	1,365,000.00(A)
Operating Assets	3,625,000.00(B)	4,000,000.00(B)	7,625,000.00(B)
1) Return on Investment = Income/Operating Assets	20.00%(A/B)	16.00%(A/B)	17.90%(A/B)
Required Income @12% of Operating assets	435,000.00	480,000.00	915,000.00
2) Residual income = ROI- Required Income	290,000.00	160,000.00	450,000.00

ROI is greater if project is not undertaken

RI is greater if project is not undertaken

Hence,

Leslie should not be accept the project if she decides based on ROI

Therefore,

Leslie should be accept the project if she decides based on RI

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