Reference no: EM133013938
Question - Wilson Limited has two divisions, Division X and Division Y, whose performance are under review:
Division X currently earns a profit of $350,000 and has net assets of $1,500,000.
Division Y currently earns a profit of $500,000 and has net assets of $3,250,000.
Divisional Managers are paid performance bonuses on the basis of the division's Return on Investment (ROI).
Wilson Limited has a cost of capital of 18%. Each of the divisions is considering an investment project that requires an initial outlay of $1million and has a useful life of 5 years. The project under consideration by Division X will make a ROI of 20% per annum. The project under consideration by Division Y will make a ROI of 16% per annum.
Using the figures above, calculate the ROI and the Residual Income for each of the divisions of Wilson Limited.
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