Question

The Monarch Division of Allgood Corporation has a current ROI of 13 percent. The company target ROI is 9 percent. The Monarch Division has an opportunity to invest $5,700,000 at 11 percent but is reluctant to do so because its ROI will fall to 12.24 percent. The present investment base for the division is $9,300,000. Required Calculate the current residual income and the residual income with the new investment opportunity being included. Based on your answers to requirement a, should Monarch Division make the investment?



Calculate the current residual income and the residual income with the new investment opportunity being included.



Based on your answers to requirement a, should Monarch Division make the investment?

Answer 1

Answer and Explanation:

The computation is shown below:

Current residual Income is

= current investment base × (Current ROI - Target ROI)

= $9,300,000 × (13% - 9%)

= $9,300,000 × 4%

= $372,000

Now

New residual income is

= (New investment base) × (New ROI - target ROI)

= ($9,300,000 + $5,700,000) × (12.24% - 9%)

= $15,000,000 × 3.24%

= $486,000

Yes, Monarch division should make the investment because the new residual income is more than the present residual income