Return on Investment and Investment Decisions

Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert.

The budgeted income of the division was $725,000 with operating assets 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 the company is 12%.

1. Compute the ROI of the following (round to the nearest whole percent):

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 the following:

a. The division if the radio project is not undertaken. $

b. The radio project alone. $

c. The division if the radio project is undertaken. $