The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%. Required ( support your answers with explanations):
a. Calculate the company's return on investment (ROI) and residual income (RI).
b. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?(Note: the decision model for the division manager is self-interested i. e. centers on the decision's effect on his evaluation criteria)
c. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?(Note: the decision model for the division manager is self-interested i. e. centers on the effect on his evaluation criteria)

Here, we are preparing the cpmpany's return on investment (ROI), residual income (RI) etc

a. Computation of the Return on investment (ROI):

Return on investment = (Operating income/Average operating assets) * 100

Return on investment = ($380,000/$2,000,000) * 100

Return on investment = 0.19

Return on investment  = 19%

Computation of the residual income (RI)

Residual income = [(Operating income - (Return on investment *Average operating assets)]

Residual income = $380,000 - (18% * $2,000,000)

Residual income = 380,000 - $360,000

Residual income = $20,000

b. Given Information

Investment = $70,000

Annual operating income = $12,950

Department's current return on investment = 20%

The actual return on investment for this project will equals:

= (Annual operating income / Investment) * 100

= ($12,950/$70,000) * 100

= 0.185

= 18.5%

Therefore, the manager of the division will not be inclined to request funds to make this investment that will yield an ROI of 18.5% because the department is already making 20%.

c. Given Information

Investment = $70,000

Annual operating income = $12,950

Current divisional residual income = $50,000

The actual residual income from this project will be:

= Annual operating income - (Return on investment * Investment)

= $12,950 - (18% * $70,000)

= $12,950 - $12,600

= $350

Therefore, the division manager will be inclined to request funds for this investment that will increase the residual Income marginally from $50,000 to $50,350 because her evaluation depends on an absolute figure and not a relative one (Return on investment).

See similar solution here

link

The Clipper Corporation

a. The company's return on investment (ROI) and residual income (RI):

ROI = $380,000/$2,000,000 x 100

= 19%

RI = $380,000 - (18% of $2,000,000)

= 380,000 - $360,000

= $20,000

b. Investment = $70,000

Annual operating income = $12,950

Department's current return on investment = 20%

Actual return on investment for this project = $12,950/$70,000 x 100

= 18.5%

The manager of the division will not be inclined to request funds to make this investment that will yield an ROI of 18.5% when the department is already making 20%.  This new investment will dilute his current ROI and adversely affect his performance evaluation.

c. Investment = $70,000

Annual operating income = $12,950

Current divisional residual income = $50,000

Actual residual income from this project,

= $12,950 - (18% of $70,000)

= $12,950 - $12,600

= $350

The division manager will be inclined to request funds for this investment that will increase her Residual Income marginally from $50,000 to $50,350, because her evaluation depends on an absolute figure and not a relative one (ROI).

Explanation:

1. The Clipper Corporation's Residual Income is equal to its operating income minus (minimum required return x operating assets).

2. The Clipper Corporation's Return on Investment is a derivative obtained from dividing the returns of its investment by the cost of the investment.

whats the

of the three mortgage options that demarco and tanya have to choose from, the balloon payment mortgage would be their best option, over adjustable payment and fixed payment plans.ultimately, the balloon payment plan would save demarco and tanya overall, in interest, would cost less monthly, and they would only have to make these payments for 8 years, opposing to 30 years for adjustable or fixed payment plans. 

overall, demarco and tanya would save $80,811 if they chose balloon payments over fixed payments, and would save $116,711 if they choose balloon payments over adjustable payments. benefits with choosing fixed payments over adjustable payments is that, in the end, the payments will still be $836.30 a month, while with adjustable payments, the initial monthly payments will be $763.38 to $1082.70 a month, ultimately leading to a more costly purchase. benefits with choosing fixed payments over balloon payments are not present. benefits in choosing adjustable payments over is that it has a lower interest rate, and starts with lower monthly payments initially. benefits in choosing adjustable payments over balloon payments include a lower interest rate, and lower initial monthly payments. benefits in choosing balloon payments over fixed payments include lower interest rates, lower overall price, lower monthly payments, takes less time to pay off, and does not require a downpayment. benefits in choosing balloon payments over adjustable payments include, lower monthly payments (when averaged), takes less time to pay off, and lower overall price.

hence, option c, balloon payments, is the best option for demarco and tanya to make this purchase, for it will save them a minimum of $80811, and a maximum of $116,711.