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Division A of X plc produced the following results in the last financial year.
Net profit $200,000 Gross capital employed$1,000,000
For evaluation purposes all divisional assets are valued at original cost.
The division is considering a project that has a positive NPV, will increase annual net profit by $15,000, but will require average inventory levels to increase by $50,000 and non-current assets to increase by $50,000.
Xplc imposes a 16% capital charge on its divisions. Given these circumstances, will the evaluation criteria of return on investment (ROI) and residual income (RI) motivate divisionAmanagers to accept the project?
Suggested Answer: C, D, F
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38 comments · newest first
AL
Alex
11 months ago
Definitely think ROI will be a no, but RI could still motivate acceptance.
WE
Werner
11 months ago
Doubtful that managers will go for it if ROI is negative.
NO
Novella
11 months ago
Surprised that the project has a positive NPV but still might fail ROI.
LI
Lillian
12 months ago
I think ROI will be a no, but RI could still be a yes!
EL
Elroy
12 months ago
ROI is calculated as profit divided by capital employed, so it might not look good.
RO
Roosevelt
12 months ago
I feel like both metrics might not support the project since the increase in capital employed is significant, but I need to double-check how the capital charge impacts RI.
FL
Florinda
1 year ago
I practiced a similar question where increasing assets hurt ROI, so I’m leaning towards saying ROI might not motivate acceptance, but RI could still be positive.
BO
Bong
1 year ago
I think the project will likely improve ROI because of the positive NPV, but I’m a bit confused about how the capital charge affects RI.
GE
Gerald
1 year ago
I remember that ROI is calculated as net profit divided by capital employed, so I’m not sure if the increase in profit will be enough to cover the additional capital.
MA
Marylou
1 year ago
No problem, I've got this. The key is to focus on the changes in net profit, capital employed, and the capital charge. If the ROI increases but the RI decreases, then option B is the answer.
SL
Slyvia
1 year ago
I'm a bit confused by the capital charge and how that impacts the RI calculation. I'll need to review my notes on residual income to make sure I'm approaching this correctly.
AL
Alfred
1 year ago
Okay, let me think this through step-by-step. I'll need to find the current ROI and RI, then recalculate them with the new project to see if they change.
JO
Johanna
1 year ago
This seems like a straightforward capital budgeting problem, but I'll need to carefully calculate the ROI and RI to determine the impact of the new project.
EL
Elliott
1 year ago
ROI and RI, the dynamic duo of corporate decision-making. Bet the exam writers had a field day coming up with this one.
SH
Shenika
1 year ago
Even though RI is motivating, without ROI it might not be enough to accept the project.
NA
Nakisha
1 year ago
C) ROI No RI Yes
JI
Jina
1 year ago
ROI looks good, but RI might not be enough to motivate acceptance.
CE
Celia
1 year ago
B) ROI Yes RI No
FR
Freeman
1 year ago
I think the project will be accepted based on both ROI and RI.
RE
Reena
1 year ago
A) ROI Yes RI Yes
GI
Gilma
1 year ago
Let's see, increased profits but also more capital employed. Better call in the management consultants to sort this out!
EM
Emmett
1 year ago
B) ROI Yes RI No
MA
Margot
1 year ago
I think the project should be accepted based on the ROI and RI criteria.
LA
Latrice
1 year ago
A) ROI Yes RI Yes
NI
Nikita
1 year ago
This is the kind of question that keeps accountants up at night. Time to break out the abacus and sharpen the pencils!
KE
Kerry
2 years ago
Ah, the age-old dilemma of corporate performance metrics. Sounds like a job for a spreadsheet ninja!
LY
Lyda
1 year ago
It seems like the project might be accepted based on RI only.
LA
Lavera
1 year ago
C) ROI No RI Yes
EL
Elliott
1 year ago
I'm not sure if the project will be accepted based on ROI alone.
ME
Melynda
1 year ago
B) ROI Yes RI No
WH
Whitney
1 year ago
B) ROI Yes RI No
ME
Mel
1 year ago
I think the project will be accepted based on both ROI and RI.
NI
Nicolette
1 year ago
A) ROI Yes RI Yes
WH
Whitney
1 year ago
A) ROI Yes RI Yes
MA
Ma
2 years ago
Hmm, this is a tricky one. Gotta weigh the impact on ROI and RI carefully. Wonder if there's a calculator app for this?
ME
Merilyn
2 years ago
But what about RI? Will that also motivate them?
ME
Melvin
2 years ago
I believe ROI will motivate them to accept the project, as it will increase annual net profit.
ME
Merilyn
2 years ago
Do you think the evaluation criteria of ROI and RI will motivate division A managers to accept the project?