Jasper Corporation Is Organized in Three Separate Divisions Required:
A

question 42

Essay

Jasper Corporation is organized in three separate divisions. The three divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the overall company produced a 12% return on its investment.
Managers of Jasper's Iowa Division recently studied an investment opportunity that would assist in the division's future growth. Relevant data follow. $\begin{array}{lcc}& \begin{array}{c}\text { Iowa } \\\text { Division }\end{array} & \begin{array}{c}\text { Investment } \\\text { Opportunity }\end{array} \\\text { Income } & \$ 12,800,000 & \$ 4,200,000 \\\text { Invested capital }& 80,000,000 & 30,000,000\end{array}$
Required:
A. Compute the current ROI of the Iowa Division and the division's ROI if the investment opportunity is pursued.
B. What is the likely reaction of divisional management toward the acquisition? Why?
C. What is the likely reaction of Jasper's corporate management toward the investment? Why?
D. Assume that Jasper uses residual income to evaluate performance and desires an 11% minimum return on invested capital. Compute the current residual income of the Iowa Division and the division's residual income if the investment is made. Will divisional management likely change its attitude toward the acquisition? Why?

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