QN: The New Products Division, of Testar Company, has developed a potential new

Question

QN: The New Products Division, of Testar Company, has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is accurate? Multiple Choice 1)The new product is acceptable because it will yield an ROI that is higher than the target ROI and will yield residual income of $40,000. 2)The new product will yield residual income of $45,000. 3)The new product will decrease the company wide ROI. 4)The new product is unacceptable because it will yield an ROI that is lower than the target ROI.

Explanation / Answer

Calculate Residual income :

Residual income =Actual operating income- Minimum operating income

= 1400000-(8500000*16%)

Residual income = 40000

So answer is  1)The new product is acceptable because it will yield an ROI that is higher than the target ROI and will yield residual income of $40,000.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.