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Sir, sorry for writing the whole question, but I don’t understand it. If possible, could you explain it in a simple way? I would really appreciate it
A division currently earns a return on investment (ROI) of 20%. It is considering investing in a project which has a residual income (RI) of $1,000 at an imputed interest charge of 20%.
What is the effect on the division’s ROI if the project is undertaken?
? Increase
? Decrease
? Remain the same
? No possible to tell from this informationI am not sure what it is you do not understand – I assume that you studied Divisional Performance before attempting the question?
Given that the RI is positive with an imputed interest charge of 20%, the ROI of the proposed investment must be more than 20%. Since the division currently has an ROI of 20%, accepting the investment will increase the ROI of the division.
I theoretically thought it was like that, but the example given in the book’s answer completely confused me. But I understood it, thank you
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