Question

The manager can invest in an additional project that would require $40,000 investment in additional assets and would generate $6,000 of additional income. The company's minimum rate of return is 14%. Which of the following statements is true? a. If the manager invests in the additional project, ROI of the division will decrease. b. The residual income of the project is less than the residual income of the division without the project; therefore the project will be rejected. c. Average investment for Stock Division will decrease if the project is accepted for investment. d. If the manager invests in the additional project, residual income of the division will increase. e. None of these.

Answer 1

Answer:

d. If the manager invests in the additional project, residual income of the division will increase.

Explanation:

RI = Operating Income - (Operating Assets x Minimum Required Rate of Return)

with adding the additional project

Operating Income: $60000 +6000 =$66000

Operating Assets: $375000+$40000 =$415000

Residual income =$66000-14%*$415000 =$7900

Consider the attached information.