An investment center in Shellforth Corporation was asked to identify three proposals for its capital budget. Details of those proposals are as follows. Capital Budget Proposals A B C Capital required $ 96,000 $ 60,000 $ 180,000 Annual operating return 24,960 20,400 16,200
Shellforth uses residual income to evaluate all capital budgeting projects. Its minimum required return is 10 percent.
a-1. Assume you are the investment center manager. Calculate the residual income for each project?
a-2. Which project do you prefer?
b-1. Assume your investment center’s current ROI is 18 percent and that the president of Shellforth is thinking about using ROI for the investment center’s evaluation. Calculate the ROI for each project?
b-2. Would your preferences for the projects listed change?