The current ROI for our company as a whole is 12 percent. Our minimum required rate of return on all investments is 10 percent.
One of our divisions has total assets of $4,000,000 with operating income of $800,000. We are considering the purchase of a small company that will require an investment of $800,000, and the synergies between the two companies will increase this division’s operating income by $90,000.
Q1) What is the ROI for this division before and after the proposed purchase of this small company? Please show all relevant calculations.
Q2) What is the residual income for the division before and after the proposed purchase the small company?
Q3) If my annual bonus, as head of this division is based on increasing ROI, will I have an incentive to NOT purchase this small company?