The Portland Division\'s operating data for year 2015 is as follows: Return on i

Question

The Portland Division's operating data for year 2015 is as follows:

   Return on investment       12%     
   Minimum required rate of return       10%     
   Average net operating assets       $500,000     
   Sales       $1,600,000     

Compute the net operating income of 2015.

Compute the margin of 2015.

The division is considering a new investment project with 15% of expected ROI. Should the division take or abandon the project when the performance is evaluated by (1) ROI or (2) Residual income?

Explanation / Answer

net operating income of 2015= 500000*12/100= 60000

margin of 2015= sales / average net operating assets

1600000/ 500000=3.2

the division should take the project in both situations because the project's ROI is greater than the current ROI and minimum required rate of return

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