It: Investment Center Evaluation (20 points) The Online division of Active Sport

Question

It: Investment Center Evaluation (20 points) The Online division of Active Sports Corporation is an investment center. The division's margin is 8% and turnover is 3. a. Calculate the return on investment of the Online division. Ans: manager of the Online division is considering a new project (i.e., a new website in a foreign country) that requires an investment in assets of $80,000 and can generate $9,600 profit per year. What is the return on investment for the new project? Ans: If manager of the Online division is evaluated based on return on investment, will the c. manager invest in the new project? Yes No (Circle one) Why? d. If manager of the Online division is evaluated based on residual income using 10% as a minimum rate of return, what is the effect of adopting the new project as described in (b) on the division's total residual income? The division, total residual income will increase or decrease by $ (Circle one) If manager of the Online division is evaluated based on residual income, will the manager e. invest in the new project? Yes No (Circle one) Why?

Explanation / Answer

A. Return of income computation

ROI. = Turnover * margin

= 3 cr × 8%

= 24%

B. Return on investment for new project

ROI = operating profit /net investment

= 9600 ÷ 80000

= 12%

C. No because ROI of company is greater than ROI of the new project

D. Residual income = 10%

ROI of new project =  12%

Increased income from new project is. = 2%

Amount of profit incresed after paying interst = 80000×2%

= 1600

E. Yes, they accept new project because ROI of new project is 12% is greater then required rate of return of company

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