An investor is considering a $25,000 investment in a start-up company. She estimates that she has probability 0.2 of a $15,000 l
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The complete question have been obtained online and attached below.
Returns on Investment (ROI) is the required Margin of profit the Business owners expect or are getting on their investment in the business.
The higher the returns therefore, the more impressed the business owners will be with the Management team
ROI = operating income divided by operating Assets x 100%
1. ROI for the year = 20%
2. ROI for the new line only = 16%
3. New Office product ROI = 19.2%
4. The manager will reject the proposed new line because it reduces his final ROI to 19.2% which doesn't guarantee him a bonus (I have attached a more detailed response in the attached working files)
5. Headquarters is anxious about the new product line being adopted because it gives an ROI above the business ROI of 15%.
6. Residual income (RI) is the absolute gain the Business has left distributable to shareholders after recognizing the expected Returns on Investment.
It is a gain over and above the ROI the shareholders have tasked the business to deliver.
Residual Income = controllable Margin - (Minimum Rate of return x Operating Assets)
A. RI for the year = $320,000
B. RI for the new line = $40,000
C. RI for the New office product division = $360,000
4. Improved RI is equal to $40,000, thus the Divisional Manager is very likely to approve the adoption of this new line.
