Question 3 Flowers Boutique has an opportunity to invest 200

Question 3. Flowers Boutique has an opportunity to invest 200,000 in a project that will return 50,000. Flowers Boutique has a 20% rate of return and a 30% ROI on existing business. How much will be the residual income should the method of Return on Investment (ROD) is used will you take the opportunity to invest? (5 marks) CLO2 of the investment and

Solution

Answer:

Minimum rate of return = 200000 x 20% = 40000

Expected return = 50000

residual income = 50000 - 40000 = 10000

Based on ROI = 200000 X 30% = 60000

Residual Income = 50000 - 60000 = -10000

ROI method will give negative residual income so the investment will be not advisable