Problem:
Mikey Co. group managers are evaluated annually with bonuses awarded based on ROI. In the previous fiscal year, Mikey produced 12% return on investments. This year Mikey is considering an investment that will assist in future growth in the Cooper group. Relevant data is as follows:
Cooper
Group Investment
Income $12,800,000 $4,200,000
Invested capital 80,000,000 30,000,000
Q1. Compute the Cooper group's current ROI and also the group's ROI if they pursue the investment.
Q2. What is the likely reaction of Mikey's management toward the investment? Why?
Q3. What is the likely reaction of the Cooper group's management toward the acquisition? Why?
Q4. Compute the current residual income of the Cooper group and the division's residual income if the investment is made (Mikey uses residual income to evaluate performance) if Mikey desires 11% minimum return on invested capital.
Q5. Will the Cooper group's management change its attitude toward the acquisition? Why?