Capital Investments Has Three Divisions The Company Is Planning an Expansion,which Will Require Each Division

question 62

Essay

Capital Investments has three divisions.Each division's required rate of return is 15%.Planned operating results for 2019 are as follows:
$$\begin{array} { | c | c | c | } \hline \text { Division } & \text { Operating profit } & \text { Investment } \\\hline \mathrm { A } & \$ 15,000,000 & \$ 100,000,000 \\\hline \mathrm { B } & \$ 25,000,000 & \$ 125,000,000 \\\hline \mathrm { C } & \$ 11,000,000 & \$ 50,000,000 \\\hline\end{array}$$
The company is planning an expansion,which will require each division to increase its investments by
$25 000 000 and its profit 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.Assuming the managers are evaluated on either ROI or residual income,which divisions are pleased with the expansion and which ones are unhappy?
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Definitions:

Legislative Statute

A law enacted by a legislative body, setting forth general principles and provisions regarding specific matters.

Wright Line

A legal test used in labor law to determine if an employer's action against an employee was motivated by anti-union sentiment.

Retaliation

Adverse action taken by an employer against an employee as punishment for engaging in legally protected activity, such as complaining about discrimination or harassment.

Union Activities

Various actions undertaken by labor unions including organizing, bargaining, striking, and other efforts to protect and advance members' interests.