Final answer:
The current residual income for the Monarch division is $308,000, while the new residual income with the new investment opportunity is $780,600. Based on these calculations, it would be beneficial for the Monarch division to make the investment.
Step-by-step explanation:
The current residual income for the Monarch division can be calculated using the formula:
Residual income = Net Income - (Target ROI × Investment Base)
Given that the current ROI is 15% and the investment base is $7,700,000, we can calculate the current residual income as follows:
Current residual income = 0.15 × $7,700,000 - (0.11 × $7,700,000)
= $1,155,000 - $847,000
= $308,000
To calculate the residual income with the new investment opportunity included, we need to consider the return on the investment and the resulting decrease in ROI. The new investment opportunity is $3,300,000 at 13%. We can calculate the new residual income as follows:
New residual income = (Net Income + Return from new investment) - (Target ROI × (Investment Base + New investment))
Given that the ROI will fall to 14.40% after the new investment, we can calculate the new residual income as follows:
New residual income = 0.144 × ($7,700,000 + $3,300,000) - (0.11 × ($7,700,000 + $3,300,000))
= $1,881,600 - $1,101,000
=$780,600
Based on the calculations, the current residual income is $308,000, and the residual income with the new investment opportunity is $780,600. Since the new residual income is higher than the current residual income, it would be beneficial for the Monarch division to make the investment.