Selected Data for Two Divisions of the Ramble Company Are

Essay

Selected data for two divisions of the Ramble Company are given below:
$\begin{array}{lll}&\text { South Division }&\text { North Division }\\\text { Net sales } & \$ 4,000,000 & \$ 7,000,000 \\\text { Average total assets } & \$ 2,000,000 & \$ 2,000,000 \\\text { Net operating income after taxes } & \$ 360,000 & \$ 420,000 \\\text { Average plant assets } & \$ 950,000 & \$ 800,000 \\\text { Average cost of capital } & 10 \% & 12 \%\end{array}$
Each division is considering a capital investment of $1,000,000.The annual return on the capital investment is 11%.Invested capital is defined as total assets.
Required:
A) The South Division's manager is evaluated using residual income. Should South Division accept the capital investment? Why?
B) The North Division's manager is evaluated using residual income. Should North Division accept the capital investment? Why?
C) The South Division's manager is evaluated using return on investment. Should South Division accept the capital investment? Why?