The manager of a division that produces electronic audio products is considering the opportunity to invest in two independent projects. The first is a portable MP3 player. The second is a voice recorder designed as a module for visor or palm PDAs. Without the investments, the division will have average assets for the coming year of $18 million and expected operating income of $2.7 million. The expected operating incomes and the outlay required for each investment are as follows:
|
|
MP3 Player
|
Voice Recorder
|
|
Operating income
|
$116,000
|
$105,000
|
|
Outlay
|
800,000
|
750,000
|
Corporate headquarters has made available up to $2 million of capital for this division. Any funds not invested by the division will be retained by headquarters and invested to earn the company's minimum required rate, 12%.
Required
1. Compute the residual income for each of the opportunities.
2. Compute the divisional residual income for each of the following four alternatives:
a. The MP3 player is added.
b. The voice recorder is added.
c. Both investments are added.
d. Neither investment is made; the status quo is maintained.
Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose?
3. Compute the ROI for each investment.
4. Compute the divisional ROI for each of the following four alternatives:
a. The MP3 player is added.
b. The voice recorder is added.
c. Both investments are added.
d. Neither investment is made; the status quo is maintained.
Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?