Donaldson Ceramics, a division of Kerwin Corporation, has an operating income of $66,000 and total assets of $440,000. The required rate of return for the company is 14%. The company is evaluating whether it should use return on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of Donaldson Ceramics has the opportunity to undertake a new project that will require an investment of $160,000. This investment would earn $19,200 for the company.
Read the requirements.
Requirement 1: What is the original return on investment (ROI) for Donaldson Ceramics (before making any additional investment)?
First, determine the formula to calculate the ROI.
ROI = Operating Income / Total Assets