Question: An investment center in Shellforth Corporation was asked to identify three proposals for its capital budget. Details of those proposals are:
Capital Budget Proposals
A B C
Capital required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,000 $50,000 $150,000
Annual operating return . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 16,000 15,000
Shellforth uses residual income to evaluate all capital budgeting projects. Its minimum required return is 12 percent.
Q1. Assume you are the investment center manager. Which project do you prefer? Why?
Q2. Assume your investment center's current ROI is 18 percent and that the president of Shellforth is thinking about using ROI for the investment center's evaluation. Would your preferences for the projects listed above change? Why?