Capital Investments Has Three Divisions

question 82

Essay

Capital Investments has three divisions. Each division's required rate of return is 15 percent. Planned operating results for 2011 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:

Binge Eating Disorder

An eating disorder characterized by recurrent episodes of eating large quantities of food very quickly and to the point of discomfort.

Bulimia Nervosa

An eating disorder characterized by binge eating followed by purging, to avoid weight gain.

Compensatory Behaviours

Actions taken to make up for or to correct a mistake, error, or deficiency, especially in the context of eating disorders to offset caloric intake.

Relapse Rates

The frequency at which individuals resume previous behaviors or conditions after a period of recovery or remission.