Paula Boothe, president of the Ayayal Corporation, has mandated a minimum 10% re

Question

Paula Boothe, president of the Ayayal Corporation, has mandated a minimum 10% return on investment for any project undertaken by the company. Given the company's decentralization. Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 16% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,949,000 in a new line of energy drinks that is expected to generate $217,600 in operating income.

Explanation / Answer

Residual income = Operating income-Minimum return = 217600-(1949000*10%)= 22700

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