F-C Fans sells several types of commercial and industrial fans such as exhaust fans, evaporativecoolers, and agricultural fans. Currently, the companyusesReturn on Investment (ROI) to evaluatethe performance of itsdistrictmanagers. The Western District current ROI can be calculated as follows
ROI = $720,000/6000000= 12%
The manager of the Western District has the opportunity to increaseNOI by $200,000 per year by investing in new state -of-the -art equipment at a cost of $2,500,000. The Company's minimum rateof return is 7.5%
(1) What is the ROI of the investment? Based solely on the ROI, would the company prefer the Western District manager make the investment or not? Why or why not?
(2) What would the Western District ROI be if the manager makes the investment? Based on the current performance evaluation method (using ROI), will the Western District manager accept the project? Why or why not?
(3) Calculate the Western District current residual income.
(4) Calculate the Western District residual income if the manager makes the investment. If the company changes its performance evaluation method to Residual Income, will theWestern District manager accept the project? Why or why not?
(5) This problem is an illustration of what type of problem? Which performance method will best solve the problem? Why
Equations:
ROI = NOI/ Investment
Residual income = NOI– (Investmentx Company’s Minimum Rate of Return)