New Orleans, Inc., is a multidivisional company. The present ROI for New Orleans, Inc., as a whole is 12%. New Orleans Inc. has a required rate of return on all investments of 10%. The most successful division within New Orleans Inc. is the Shellfish Division. presently the Shellfish Division has total assets of $4,000,000 with operating income of $800,000. The manager of the Shellfish Division is considering the purchase of a small company called Shrimp, Inc. The purchase of Shrimp Inc. will need an investment of $800,000, and the synergy between the two companies will increase Shellfish Division's operating income by $80,000. Bonuses in all of New Orleans divisions are awarded to managers with increasing ROIs.
a. Evaluate what is the ROI for the Shellfish Division, before and after the proposed purchase of Shrimp Inc.?
b. Find what is the residual income for the Shellfish Division, before and after the purchase of Shrimp Inc.?