Measuring Performance: Residual Income and ROI
Response to the following problem:
McCormick Corporation measures the performance of its divisions by using the residual income approach, with a minimum accepted rate of return of 16%. In 2009, the printing division, which has total assets of $250,000, generated an operating profit of $48,000, or 8% of sales. The operating results are expected to be the same in 2010. In early 2010, the printing division receives a proposal for a $50,000 investment that would generate an additional $9,000 of income per year
1. Should the manager of the printing division make the investment?
2. Would your answer to part (1) be different if McCormick Corporation used the ROI approach to evaluate the performance of its various divisions? Why or why not?