Reference no: EM132516773

The president feels very strongly that Mountain Sports should expand operations to a second location. She has even found a prime location in Canmore, Alberta, One of the great things about Canmore is its proximity to the mountains, ski-areas, hiking, biking and only about 10 minutes away from this beautiful, vibrant and internationally known Banff tourist town. Research indicates that the Canmore market is well suited to both cross-country skis and mountain bikes and that competition is fairly limited.

Performance Measurements: ROI, Residual (RI)

Management has provided the following income statement to the bank manager the expected net income in the next year.

Part A: (record responses below - show all calculations)

Using the above projected income statement, calculate the following performance measurements for the proposed Canmore expansion:

ROI, return on investment (Note: Average operating assets are $253,000)

RI, residual income (14% is considered an appropriate return)

Part B: (record responses below)

Analysis of Performance

Question 1: Management is evaluated based on return on investment and is wondering if they should expand into Canmore. If the company's current return on investment is 23%, would management accept the new project (expansion into Canmore)? Why or why not?

Question 2: What is the major weakness of using return on investment as a performance measure? Explain your answer using case facts.

Question 3: If management is evaluated based on residual income, would they be inclined to accept the project. Why or why not?