Reference no: EM133216284

Jasper Corporation is organized in three separate divisions. The three divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the overall company
produced a 129 return on its investment. Jasper's cost of capital is about 11%
Managers of Jasper's Iowa Division recently}studied an investment opportunity (they have the option of acquiring another small company by investing $30 million) that would assist in the
division's future growth. Relevant data follow
lowa
Division
$12,800,000
80,000.000
Investment
Opportunity
$ 4,200,000
30,000.000
Income
Invested capital

Required:

A. Compute the current ROI of the lowa Division and the division's ROl if the investment opportunity is pursued.
B. What is the likely reaction of divisional management toward the acquisition? Why?
C. What is the likely reaction of Jasper's corporate management toward the investment? Why?
D. Assume that Jasper uses residual income to evaluate performance and desires an 11% minimum return on invested capital. Compute the current residual income of the lowa Division and the division's residual income if the investment is made. Will divisional management likely change its attitude toward the acquisition? Why?