Ali,
ROI=Profit/Investment
10%=40,000/Investment
Investment= 400,000
New ROI = 40,000 + 15,000 / 400,000 + 100,000 = 11%
Opportunity cost 8% multiple by new investment 100,000 = 8,000
and the profit from new investment is 15,000 so the residual is 15,000 - 8,000 = 7,000
Regards
Rida
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Original Message------
Business unit A has a return on investment of 10%, with a net profit for the year of $40,000. The opportunity cost for the business unit investments has been calculated at 8%. The company plans to purchase a new machine worth $100,000 and expects the net profit to rise by an additional $15,000. The new purchase decision will increase the return on investment
a. by 1% and increase the residual income by $8,000.
b. by 1% and increase the residual income by $15,000.
c. to 11% and increase the residual income by $7,000.
d. to 11% and increase the residual income by $15,000.
The correct answer is C !! Is there any colleague can explain this answer for me??