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Which division had the higher return on investment

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Question - Company Epsilon has two retail divisions, retail division #1 and retail division #2, which reported the following results for the year end of 2019. The required rate of return set for the retail divisions is 10%.

Results for the year end of 2019

 

Retail division #1

Retail division #2

Net operating income

$5,000,000

$15,000,000

Average operating assets

$30,000,000

$100,000,000

If no investment in made for 2020, both retail divisions are expected to maintain the same net operating income and average operating assets as of 2019. However, there is an opportunity in 2020 for Company Epsilon to invest in one of the two retail division. The investment would be of $15,000,000 and would generate additional net operating income of $2,400,000 per year.

Required -

Which division had the higher return on investment (ROI) in 2019 and why?

Which division had the higher residual income (RI) in 2019 and why?

If the managers of the retail divisions are evaluated based on return on investment (ROI), will the managers want to invest in 2020 and why?

Reference no: EM132564104

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