3. a. and b.
Division A Division B Division C
Return on investment (ROI) ... 20% 8% 16%
Therefore, if the division is pre-
sented with an investment op-
portunity yielding 15%, it
probably would... Reject Accept Reject
Minimum required return for com-
puting residual income... 14% 10% 16%
probably would... Accept Accept Reject
If performance is being measured by ROI, both Division A and Division C
probably would reject the 15% investment opportunity. These divisions’
ROIs currently exceed 15%; accepting a new investment with a 15%
rate of return would reduce their overall ROIs. Division B probably would
accept the 15% investment opportunity, since accepting it would in-
crease the division’s overall rate of return.
If performance is measured by residual income, both Division A and Di-
vision B probably would accept the 15% investment opportunity. The
15% rate of return promised by the new investment is greater than their
required rates of return of 14% and 10%, respectively, and would there-
fore add to the total amount of their residual income. Division C would
reject the opportunity, since the 15% return on the new investment is
less than its 16% required rate of return.
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