Capital Investments Has Three Divisions

question 51

Essay

Capital Investments has three divisions.Each division's required rate of return is 15 percent.Planned operating results for next year are:
The company is planning an expansion requiring each division to increase its investments by $25,000,000 and its income by $4,500,000.Required:
a.Compute the current ROI for each division.
b.Compute the current residual income for each division.
c.Rank the divisions according to their current ROIs and residual incomes.
d.Determine the effects after adding the new project to each division's ROI and residual income.
e.Which Divisions are pleased with the addition and which ones are unhappy assuming the managers are evaluated on a combination of ROI and residual income? Is a combination of ROI and residual income appropriate for the divisions?

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Definitions:

Deviation IQ

Standard score with a mean of 100 and a standard deviation of 15. As the name implies, these scores are generally used in intelligence testing.

Test-retest Reliability

The consistency of a test's results when administered to the same individuals at different points in time.

Normal Curve

A bell-shaped curve that represents the distribution of scores on many psychological tests, where most scores are near the average and few are very high or very low.

Raw Scores

The original, unmodified scores obtained directly from a test or assessment before any adjustments or conversions are applied.