Compute the ROI

Return on Investment and Investment Decisions

Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert. The budgeted income of the division was $725,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 12 percent. Round all numbers to two decimal places.

Required:

1. Compute the ROI of the:

a. division if the radio project is not undertaken.

b. radio project alone.

c. division if the radio project is undertaken.

2. Compute the residual income of the:

a. division if the radio project is not undertaken.

b. radio project alone.

c. division if the radio project is undertaken.

3. Conceptual Connection: Do you suppose that Leslie will decide to invest in the new radio?

Why or why not?

Solution: