1. Problem 1 – Return on Investment (ROI) The problem states that a company invested 1,000,000 in a new product line and generated an annual operating income of 250,000. We need to compute the ROI and interpret the result. Step 1: Recall that Return on Investment (ROI) is calculated by dividing the operating income by the investment and converting to a percentage: $$ ROI = \left( \frac{\text{Operating Income}}{\text{Investment}} \right) \times 100 $$ Step 2: Substitute the given values: $$ ROI = \left( \frac{250,000}{1,000,000} \right) \times 100 = 0.25 \times 100 = 25\% $$ Step 3: Interpretation: An ROI of 25% means the company earns 25 cents for every peso invested annually from this product line. This is generally a good return. Management should continue investing in similar projects if this ROI exceeds the company’s required return or cost of capital, indicating profitable investment. 2. Problem 2 – Residual Income (RI) The problem states Division A has an operating income of 500,000 and total assets of 2,000,000, with a minimum required rate of return at 10%. We need to calculate the Residual Income and explain. Step 1: Residual Income is calculated as: $$ RI = \text{Operating Income} - (\text{Minimum Required Rate of Return} \times \text{Total Assets}) $$ Step 2: Substitute the known values: $$ RI = 500,000 - (0.10 \times 2,000,000) = 500,000 - 200,000 = 300,000 $$ Step 3: Explanation: Residual Income tells us the income earned beyond the minimum return expected by investors. A positive RI of 300,000 means Division A generated 300,000 more than the minimum required return, so it is adding value to the company. Summary: - ROI = 25%, indicating a good return on investment. - RI = 300,000, showing that Division A adds value by exceeding minimum return expectations.