08 Dec Comparing return on investment and residual income
Comparing return on investment and residual incomeThe manager of the Alston Division of Stanford Manufacturing Corporation is currently producing a 20 percent return on invested capital. Stanford’s desired rate of return is 16 percent. The Alston Division has $6,000,000 of capital invested in operating assets and access to additional funds as needed. The manager is considering a new investment in operating assets that will require a $1,500,000 capital commitment and promises an 18 percent return.Requireda. Would it be advantageous for Stanford Manufacturing Corporation if the Alston Division makes the investment under consideration?b. What effect would the proposed investment have on the Alston Division’s return on investment? Show computations.c. What effect would the proposed investment have on the Alston Division’s residual income? Show computations.d. Would return on investment or residual income be the better performance measure for the Alston Division’s manager? Explain.
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