Question
Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true?
Multiple select question.
The project should be rejected by the company because its ROI is lower than the current departmental ROI.
The project should be accepted because the residual income will help push the project's ROI above the projected 12%.
The department manager may not want to accept the project because it will lower the overall ROI for the department.
The project should be accepted by the company because it increases overall residual income.
Multiple select question.
The project should be rejected by the company because its ROI is lower than the current departmental ROI.
The project should be accepted because the residual income will help push the project's ROI above the projected 12%.
The department manager may not want to accept the project because it will lower the overall ROI for the department.
The project should be accepted by the company because it increases overall residual income.
Answers
GPT-4o mini
Based on the information provided, let's evaluate each statement regarding the potential investment:
1. **The project should be rejected by the company because its ROI is lower than the current departmental ROI.**
- **False**: While the project's ROI of 12% is lower than the current departmental ROI of 15%, the project is expected to increase residual income, which is a positive factor in assessing the overall benefits of the investment.
2. **The project should be accepted because the residual income will help push the project's ROI above the projected 12%.**
- **False**: The statement is misleading, as residual income refers to the profit remaining after deducting the required return on investment. The ROI of the project remains at 12% regardless of the residual income. The increase in residual income does not change the ROI percentage.
3. **The department manager may not want to accept the project because it will lower the overall ROI for the department.**
- **True**: Since the new project has an ROI of 12%, which is lower than the existing departmental ROI of 15%, accepting the project would decrease the average ROI of the department. This could make the department manager reluctant to accept the project as it may affect their performance metrics.
4. **The project should be accepted by the company because it increases overall residual income.**
- **True**: The project increases the residual income by $15,000, which is beneficial for the company's overall financial performance despite the ROI issue.
In summary, the statements that are true are:
- The department manager may not want to accept the project because it will lower the overall ROI for the department.
- The project should be accepted by the company because it increases overall residual income.
1. **The project should be rejected by the company because its ROI is lower than the current departmental ROI.**
- **False**: While the project's ROI of 12% is lower than the current departmental ROI of 15%, the project is expected to increase residual income, which is a positive factor in assessing the overall benefits of the investment.
2. **The project should be accepted because the residual income will help push the project's ROI above the projected 12%.**
- **False**: The statement is misleading, as residual income refers to the profit remaining after deducting the required return on investment. The ROI of the project remains at 12% regardless of the residual income. The increase in residual income does not change the ROI percentage.
3. **The department manager may not want to accept the project because it will lower the overall ROI for the department.**
- **True**: Since the new project has an ROI of 12%, which is lower than the existing departmental ROI of 15%, accepting the project would decrease the average ROI of the department. This could make the department manager reluctant to accept the project as it may affect their performance metrics.
4. **The project should be accepted by the company because it increases overall residual income.**
- **True**: The project increases the residual income by $15,000, which is beneficial for the company's overall financial performance despite the ROI issue.
In summary, the statements that are true are:
- The department manager may not want to accept the project because it will lower the overall ROI for the department.
- The project should be accepted by the company because it increases overall residual income.