Gable Ceramics, a division of Alderman Corporation, has an operating income of $ 64 comma 000 and total assets of $ 400 comma 000. The required rate of return for the company is 11 %. The company is evaluating whether it should use return on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of Gable Ceramics has the opportunity to undertake a new project that will require an investment of $ 100 comma 000. This investment would earn $ 14 comma 000 for the company.

The question is meant to compare the original ROI and RI before the investment compared to the new investment is ROI and RI

The new investment has a lower return on investment of 11% compared to original 14%

However, the project should be considered since it has $3000 residual income in additional to the original residual income

Explanation:

The return on investment and residual income before the new investment are computed thus:

return on investment=operating income/total assets=$64,000/$400,000=16%

residual income=operating income - (total assets*rate of return)

=$64,000 - ($400,000*11%) = $20,000

Thereafter, the return on investment and residual income on the new investment are computed thus:

return on investment=operating income/total assets=$14,000/$100,000=14%

residual income=operating income - (total assets*rate of return)

=$14,000 - ($100,000*11%) = $3,000