Bellco, a division of Becker International Corporation, is operated under the di
ID: 2570639 • 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 $74,340,000 of assets that generate approximately $11,120,000 in annual net income. Becker International has additional investment capital of $14,470,000 that is available for the division managers to invest. Mr. Sedatt is aware of an investment opportunity that will provide an 13 percent annual net return. Becker International’s desired rate of return is 12 percent.
1. Assume that Mr. Sedatt’s performance is evaluated based on his ability to maximize return on investment (ROI). Compute ROI using the following two assumptions: Bellco retains its current asset size and Bellco accepts and invests the additional $14,470,000 of assets.
2. Assume that Mr. Sedatt’s performance is evaluated based on his ability to maximize residual income. Compute residual income using the following two assumptions: Bellco retains its current asset base and Bellco accepts and invests the additional $14,470,000 of assets.
Current ROI % ROI with additional investment % Whether Mr. Sedatt should accept the opportunity to invest additional funds? RejectExplanation / Answer
Req 1 CURRENT Additional Investment TOTAL Annual Net income 11,120,000 1881100 13,001,100 (14,470,000*13%) Invested Capital 74,340,000 14,470,000 88,810,000 ROI (Net income /Invested capital *100) 14.96% 13% 14.64% Current ROI 14.96% ROI with Additional Investment 14.64% Reject the offer, as it will lead to decrease in ROI Req2: CURRENT Additional Investment TOTAL Annual Net income 11,120,000 1881100 13,001,100 (14,470,000*13%) Invested Capital 74,340,000 14,470,000 88,810,000 Desired return 12% 12% 12% Desired Return in $ (Invested Capital*Desired return) 8920800 1736400 10657200 Residual Income 2,199,200 144,700 2,343,900 Residual Income Current 2199200 Residual Income after additional investment 2343900 Offer must be accepted as it increase the residual income
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