An investment center in Shellforth Corporation was asked to identify
three proposals for its capital budget. Details of those proposals are:
Capital Budget Proposals
A B C
Capital Required $80,000 $50,000 $150,000
Annual Operating Return 24,000 16,000 15,000
Shellforth uses residual income to evaluate all capital budgeting projects. Its minimum required return is 12 percent.
a. Assume you are the investment center manager. Which project do you prefer? Why?
b. 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. Would your preferences for the projects
listed above change? Why?
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