ACCA · Question 05 · Performance measurement and control
Section A
MetroWater, a public utility company, evaluates its regional divisions using Return on Investment (ROI). The Northern Division currently has an ROI of 18%. The company's cost of capital is 12%. The Northern Division manager is considering a new water purification project that will yield an ROI of 15%.
How will the manager's decision regarding the new project differ if evaluated on ROI versus Residual Income (RI)?
Answer options:
The manager will accept the project under both ROI and RI.
The manager will reject the project under both ROI and RI.
Under ROI, the manager will reject the project; under RI, the manager will accept it.
Under ROI, the manager will accept the project; under RI, the manager will reject it.
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