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Calculate the residual income for the proposed new line

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Question - Paula Boothe, president of the Pina Corporation, has mandated a minimum 8% return on investment for any project undertaken by the company. Given the company's decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 14% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,974,000 in a new line of energy d rinks that is expected to generate $220,900 in operating income.

a) Calculate the residual income for the proposed new line of energy drinks.

b) If Martin Koch is evaluated based on residual income will he choose to invest in the new line of energy drinks?

Reference no: EM133189756

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