Problem
The Oprah Winfrey Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%. (Support your answers with explanations):
1. Calculate the Oprah Winfrey company's return on investment (ROI) and residual income (RI).
2. Oprah Winfrey Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment? (Note: the decision model for the division manager is self-interested i.e. centers on the decision's effect on his evaluation criteria)
3. Oprah Winfrey Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?