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Divisional performannce management:
division X ROI:
without project=12%
with project=12.3%
divisional RI=-$60 000project in isolation:
ROI =15%
RI=-$3 000company’s required ROI=18%
Question: assess the project using both ROI and RI
MY Answer:
ROI:
since with the project, the ROI of the division will increase, the project should be undertaken. this is still true even when the higher ROI will be lower than the required 18%. this is akin to making a bad situation bettervs The text book answer:
the division will want to accept this project which should be rejected as it fails to hit the company target of 18%.RI: no. the investment would not add to the RI, so the DIVISION AND COMPANY does not benefit from undertaking this project
Please clarify.
What is typed for RI is correct because the RI of the project is negative.
With regard to the ROI, usually what you have written is correct and they would accept the project. However the wording of the question is very poor and it is “required ROI” wording which means the book you are using could claim their answer to be correct.
You will not have this wording problem with real exam questions.
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