I: Investment Center Evaluation (20 points) The Online division is896 and turnov
ID: 2596470 • Letter: I
Question
I: Investment Center Evaluation (20 points) The Online division is896 and turnover is 3. of Active Sports Corporation is an investment center. The division's margin a. Calculate the return on investment of the Online division. Ans: The manager of the Online division is considering a new project (i.e, a new website in a foreign country) that requires an investment in assets of $80,000 and can generate $9,600 profit per year. What is the return on investment for the new project? b. Ans: c. If manager of the Online division is evaluated based on return on investment, will the manager invest in the new project? Yes No (Circle one) Why? If manager of the Online division is evaluated based on residual income using 10% as a minimum rate of return, what is the effect of adopting the new project as described in (b) on the division's total residual income? d. The division' total residual income will increase or decrease by (Circle one) If manager of the Online division is evaluated based on residual income, will the manager invest in the new project? e. Yes No (Circle one)Explanation / Answer
a. With the given information, it is assumed the margin is equal to the return on investment rate = 8%
b. In case of new project the return of investment = profit margin / investment in new project
= $9,600/$80,000 = 12%
c. Yes, the manager shall invest in the new project since the return on investment from new project is more than that of the existing old project.
d. The residual income shall increase by $1,600.
$80,000 x (12%-10%)