EXERCISE 12-17 (20 MINUTES)

2. The division’s management would have been more likely to accept the

investment opportunity if residual income, rather than ROI, had been

used to evaluate performance and determine bonuses. The investment

would have lowered the division’s ROI because its expected return of

13% is lower than the division’s historical returns of 14% to 17% as well

as its most recent ROI of 15%. In contrast, the division’s residual in-

come would be increased by the investment opportunity. From the

standpoint of the entire company, an investment whose return exceeds

the minimum required return should be accepted. However, when bo-

nuses are based on ROI, the division will likely reject any investment

that lowers the division’s ROI even if it exceeds the minimum required

Problem 12-29 (45 minutes)