Bob Banker is the manager of one location of the Fastwhere Inc. chain, which is a delivery service. Banker’s location is currently earning an ROI of 14 percent on existing average capital of $750,000. The minimum required return for Fastwhere Inc. is 12 percent. Banker is considering several additional investment projects, which are independent of existing operations and are independent of each other. The following table lists the projects: Instructions a. Which of the projects would Banker choose for investment if his objective were to maximize his location’s ROI? b. Which projects increase the value of Fastwhere Inc.? c. Which projects have a negative residual income? d. Create two rankings for the projects in order of acceptability if Banker is evaluated (1) on ROI and (2) on residual income. e. On the basis of the projects in the list explain why underinvestment is a problem when using ROI for evaluation purposes.
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