Bellco. a division of Becker international Corporation is operated under the dir
ID: 2429625 • Letter: B
Question
Bellco. a division of Becker international Corporation is operated under the direction of Antoin Sedatt Bellco is an independent Investment center with approximately $74,900,000 of assets tl Becker International has additional investment capital or $15.010.0oothat is avaiable for the division managers to invest. Mr Sedatt is aware of an investment opportunity that wil provide an 14 percent annual net retum. Becker Intemational's desired r of return is 13 percent hat ate approximately $11,710,000 ual net income Required eBook 1. Assume that M Sedatts mance is evaluated is abilty to maximize return on investment (ROj. Compute üsing the tofowing two assurnptions. Bellco retains ins current asset size and Bellco accepts and invests the additional $15010,000 of assets Determine whether Mr. Sedatt shouldcetthe pportunity to invest additional funds. 2. Assume that Mt Sedatts performance is evatuated based on his ability to maximize residual income. Compute residual in following two assumpuons Belco retains its current asset bese and Belico accepts and invests the additional using the $15.010,000 of assets. Determine whether Mr Sedatt shdu nds B. Which roctmis ROtorresiduel income) is more ike ütbsueoptimization Complete this question bv entering your answers in the tabs below Required Required RegutedExplanation / Answer
Solution 1:
Existing asset size = $74,900,000
Annual income = $11,710,000
Current ROI = Annual net income / Operating assets = $11,710,000 / $74,900,000 = 15.63%
Assets size after additional investment = $74,900,000 + $15,010,000 = $89,910,000
Annual income after additional investment = $11,710,000 + ($15,010,000 * 14%) = $13,811,400
ROI after additoonal investment = $13,811,400 / $89,910,000 = 15.36%
As accepting new investment, will result in decrease in ROI, therefore Mr. Sedatt should not accept the new investment opportunity.
Solution 2:
Current residual income = Net Income - Minimum required return = $11,710,000 - ($74,900,000*13%) = $1,973,000
Residual income with additional investment = $13,811,400 - ($89,910,000*13%) = $2,123,100
As residual income is increasing on accepting additional investment opportunity, therefore Mr. Sedatt should accept the investment opportunity.
Solution 5:
ROI technique is more likely to result in suboptimization.
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