Evaluating New Investments Using Return on Investment (ROI) and Residual Income

Selected sales and operating data for three divisions of different structural engineering firms are

given as follows:

Required:

1. Compute the return on investment (ROI) for each division using the formula stated in terms of

margin and turnover.

2. Compute the residual income for each division.

3. Assume that each division is presented with an investment opportunity that would yield a 15%

rate of return.

a. If performance is being measured by ROI, which division or divisions will probably

accept the opportunity? Reject? Why?

b. If performance is being measured by residual income, which division or divisions will

probably accept the opportunity? Reject? Why?