Problem
ROI and Residual Income: Impact of a New Investment
The Mustang Division of Detroit Motors had an operating income of $900,000 and net assets of $5,000,000. Detroit Motors has a target rate of return of 16 percent.
(a) Compute the return on investment.
(b) Compute the residual income.
(c) The Mustang Division has an opportunity to increase operating income by $200,000 with an $850,000 investment in assets.
1. Compute the Mustang Division's return on investment if the project is undertaken.
2. Compute the Mustang Division's residual income if the project is undertaken.