Answer:
The question is meant to compare the original ROI and RI before the investment compared to the new investment is ROI and RI
The new investment has a lower return on investment of 11% compared to original 14%
However,the project should be considered since it has $3000 residual income in additional to the original residual income
Explanation:
The return on investment and residual income before the new investment are computed thus:
return on investment=operating income/total assets=$64,000/$400,000=16%
residual income=operating income-(total assets*rate of return)
=$64,000-($400,000*11%)=$20,000
Thereafter,the return on investment and residual income on the new investment are computed thus:
return on investment=operating income/total assets=$14,000/$100,000=14%
residual income=operating income-(total assets*rate of return)
=$14,000-($100,000*11%)=$3,000
