__Problem
15-22:__

Comparing return on investment and residual

income

Wells Corporation operates three investment

centers. The following financial statements apply to the investment center

named Huber Division.

**Required**

a. Which should be used to determine the

rate of return (ROI) for the Huber investment center, operating income or net

income? Explain your answer.

b. Which should be used to determine the

ROI for the Huber investment center, operating assets or total assets? Explain

your answer.

c. Calculate the ROI for Huber.

d. Wells has a desired ROI of 15 percent.

Headquarters has $96,000 of funds to assign to its investment centers. The

manager of the Huber Division has an opportunity to invest the funds at an ROI

of 17 percent. The other two divisions have investment opportunities that yield

only 16 percent. Even so, the manager of Huber rejects the additional funding.

Explain why the manager of Huber would reject the funds under these

circumstances.

e. Explain how residual income could be

used to encourage the manager to accept the additional funds.

__Problem
16-18:__

Using net present value and internal rate

of return to evaluate investment opportunities Veronica Tanner, the president

of Tanner Enterprises, is considering two investment opportunities. Because of

limited resources, she will be able to invest in only one of them. Project A is

to purchase a machine that will enable factory automation; the machine is

expected to have a useful life of four years and no salvage value. Project B

supports a training program that will improve the skills of employees operating

the current equipment. Initial cash expenditures for Project A are $100,000 and

for Project B are $40,000. The annual expected cash inflows are $31,487 for

Project A and $13,169 for Project B. Both investments are expected to provide

cash flow benefits for the next four years. Tanner Enterpriseâ€™s cost of capital

is 8 percent.

**Required**

a. Compute the net present value of each

project. Which project should be adopted based on the net present value

approach?

b. Compute the approximate internal rate of

return of each project. Which one should be adopted based on the internal rate

of return approach?

c. Compare the net present value approach

with the internal rate of return approach. Which method is better in the given

circumstances? Why?