Reference no: EM133201841

Question

Honolulu Enterprises has two decentralized divisions (Coconut and Guava) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below:

Coconut Guava

Fixed assets, gross $ 4,500 $ 7,200

Accumulated depreciation $ 2,700 $ 2,160

Other assets $ 900 $ 1,350

Liabilities $ 900 $ 1,800

Sales $ 12,150 $12,960

Net income after tax* $ 1,330 $ 1,810

Average age of fixed assets (years) 15 5

*Net income is after tax but before interest

Honolulu's weighted average cost of capital (WACC) is 15% and the company uses residual income as a method to evaluate performance. Which of the following statements is correct? Please support your answer with calculations to receive full credit.

A. Coconut's ROI will be raised by divesting of a project with a 20% ROI but its RI will be lower.

B. Coconut's RI will decrease by taking on a project with a $12 cost and net income before interest of $3.

C. Guava's RI will increase by taking on a project with an $8 cost and net income before interest of $1.1.

D. Coconut's RI is less than Guava's RI.

E. None of the choices are correct