Answer:
e. Is right, since residual income will rise from $7,500 to $7,900
Explanation:
The computation of given question is shown below:-
1. Current return on investment of division = $60,000 ÷ $375000 × 100
= 16%
2. Return on investment on new project = $6000 ÷ $40,000 × 100
= 15%
3. The average return on investment = ($60,000 + 6,000) ÷ ($375,000 + 40,000)
= 15.9%
4. The residual income without new project = $60,000 - ($375,000 × 14%)
= $7,500
5. The residual income with new project = $66,000 - (($375,000 + $40,000) × 14%))
= $7,900
Now we will analyze every points which is here below:-
a. It's incorrect as the average investment will go from $3,75,000 to $4,15,000
b. is incorrect, as the division's ROI will fall from 16% to 15.9%
c. This is incorrect as the residual income will increase from $7,500 to $7,900
e. Is right, since residual income will rise from $7,500 to $7,900
