Assume Gibson Modems, Inc., is a division of Gilmore Business Products (GBP). GB

Question

Assume Gibson Modems, Inc., is a division of Gilmore Business Products (GBP). GBP uses ROI as the primary measure of managerial performance. GBP has a desired return on investment (ROI) of 5.20 percent. The company has $180,000 of investment funds to be assigned to its divisions. The president of Gibson is aware of an investment opportunity for these funds that is expected to yield an ROI of 5.80 percent.

Required

a-1. Calculate the existing ROI for Gibson.

a-2. Based on your computations will the President of Gibson accept or reject the $180,000 investment opportunity?

c-1. Calculate the estimated residual income of the new investment opportunity.

c-2. Based on the residual income would the President of Gibson accept or reject the $180,000 investment opportunity?

Req A1-A2

Req C1-C2

Income Statement Sales revenue $ 680,000 Cost of goods sold (495,000 ) Gross margin $ 185,000 Sales commission (38,000 ) Depreciation expense (10,000 ) Administrative expense (73,550 ) Net income $ 63,450

Explanation / Answer

A1 ROI

A2

The President of Gibson reject the $180000 investment opportunity as ROI is greater than the required rate of return.

C1 Residual Income of the new investment opportunity

Since the residual income is greater than the required rate of return. Hence, the investment opportunity of should be accepted.

Particulars Amount (in $) Net income 63450 Add: Depreciation 10000 Net cash income 73450 Net investment 1033450 ROI 7.11% Desired rate of return 5.20%

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