Assume you are the investment center manager. Which project do you prefer? Why?

Assume you are the investment center manager. Which project do you prefer? Why?

Performance and ROI versus Residual Income

An investment center in Shellforth Corporation was asked to identify three proposals for its capital

Capital Budget Proposals

A B C

Capital required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,000 $50,000 $150,000

Annual operating return . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 16,000 15,000

Shellforth uses residual income to evaluate all capital budgeting projects. Its minimum required

return is 12 percent.

a. Assume you are the investment center manager. Which project do you prefer? Why?

b. Assume your investment center’s current ROI is 18 percent and that the president of Shellforth

is thinking about using ROI for the investment center’s evaluation. Would your preferences for the projects listed above change? Why?


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