Problem 12-36 Return on Investment for Multiple Investments, Residual Income

The manager of a division that produces add-on products for the automobile industry has just been
presented of opportunity to invest in two independent projects. The first is an air conditioner for the
back seats of van and minivans. The second is a turbocharger. Without the investment, the division will
have average assets for the coming year 0f $38.9 million and expected operating income of $4.335
million. The outlay required for each investment and the expected operating income are as follows:

Turbocharge
  Air Conditioner r
Outlay $750,000 $540,000
Operating
income 90,000 $82,080

Required:

1. Compute the ROI for each investment project.

2. Compute the budgeted divisional ROI for each of the following four alternatives:
a. The air conditioner investment is made.
b. The turbocharger investment is made.
c. Both investments are made.
d. Both investments are made.
e. Neither additional investment is made.