Reference no: EM133381296
Question: one project can be selected and the manager is paid an annual bonus based on Return on net assets (RONA). RONA is calculated as earnings before interest and net assets. The company has a current RONA of 16% with net assets of $1.6M and earnings before interest of $256,000. The cost of capital is 10%. Project E Project F Project G Project H Net Assets $800,000 $100,000 $300,000 $400,000 Net Income (Includes interest expense) $85,000 $17,000 $24,200 $58,000 Interest Expense $5,000 $3,000 $800 $2,000
Required
1. Calculate the RONA for each project and determine which project should be selected.
2. Based on the project selected in requirement 1, calculated the combined ROA for the company (use the existing RONA and add the selected project).
3. If the manager's bonus is based on Residual Income (RI), determine which project they will choose.
4. Discuss the reason for choosing a different projects under RONA versus RI. What is the RI outcome representing? If a manager is rewarded based on RONA versus ROA, what types of behaviours may they show regarding the assets and
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