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)
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