Question：Division A of Aigburth Co is considering a project which will increase annual net profit after tax by $30,000 but will require average inventory levels to increase by $200,000. The current target rate of return on investments is 13% and the imputed interest cost of capital is 12%.
Based on the ROI and/or RI criteria would the project be accepted?
A ROI – yes, RI - no
B ROI – yes RI - yes
C ROI – no, RI - yes
D ROI – no, RI - no
The ROI target is 13% and the cost of capital is 12%. The ROI is calculated as $30,000/$200,000 × 100% = 15% and so the project would be accepted. The RI is calculated as $30,000 – (12% × $200,000) = $6,000. The project would be accepted.
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