Canberra Asset Management Has Three Divisions The Company Is Planning an Expansion,which Will Require Each Division

question 5

Essay

Canberra Asset Management has three divisions.Each division's required rate of return is 15%.Planned operating results for 2019 are as follows:
$$\begin{array} { | c | r | r | } \hline \text { Division } & \text { Operating profit } & { \text { Investment } } \\\hline \mathrm { A } & \$ 22500000 & \$ 175000000 \\\hline \mathrm { B } & \$ 37500000 & \$ 187500000 \\\hline \mathrm { C } & \$ 16500000 & \$ 75000000 \\\hline\end{array}$$
The company is planning an expansion,which will require each division to increase its investments by
$37 500 000 and its profit by $6 750 000.
Required:
a.Calculate the current ROI for each division.
b.Calculate 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:

Bidders

Individuals or entities that offer a price for goods or services, especially at auctions.

Winner's Curse

A phenomenon in auctions where the winner tends to overpay due to incomplete information or overly optimistic valuation of the asset.

Rivals' Information

Data or intelligence about competitors’ strategies, performance, and operations, useful for gaining a competitive advantage in the market.

Fewer Bidders

a situation in auctions or competitive environments where there is a reduced number of participants bidding for the same item or contract.