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25 September, 11:05

Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment

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  1. 25 September, 11:20
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    Answer and Explanation:

    The computation is shown below:

    But before reaching any decision, first we have to find out the ROI for new investment which is

    ROI of new investment = net operating income : investment

    = $12,950 : $70,000

    = 18.50%

    Now

    If investment taken place, then overall ROI is

    = Total net operating income : Total average operating assets

    = ($380,000 + $12,950) : ($2,000,000 + $70,000)

    = 18.98%

    As we can see that the overall ROI i. e 18.98% is less than the currently ROI i. e 20% so he should not recommend ROI as it is shows fallen
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