Reference no: EM131871312

Alter Corporation manufactures machinery that is used by manufacturingcompanies to produce custom metal products. The company has several divisions, and it treats each division as an investment center. As such, division managers are evaluated for performance, and ROI is one of the key performance evaluation metrics. Bonuses and promotions depend on each division's ROI. Midwest Metalwerks is a division that manufactures custom computer numerically controlled (CNC) equipment that is sold to companies that create molds for custom injection molding applications. This division has been very successful during the past several years. In the most recent year, the divion earned an operating income of $3.84 millon on average operating assets of $23.7 million. Corporate management has found a $1.75 million investment project that fits the business line for Midwest Metalweks. Alter Corporate management would like Midwest Metalwerks to invest in new equipment that will enable the division to produce a new line of manufacturing equipment. Division managers are not required to accept projects proposed by corporate management, and any unused capital investment funds are returned to corporate where the corporate team invests those funds at a rate of 9.0%. The corporate management team's study shows that this investment will generate an operating income of $250,000 in the first year. Corporate management believes that there is a good opportunity to see future growth from this new line of business. After reviewing corporate's proposal, management of Midwest Metalwerks declined the $1.75 million capital project. The division's management team told corporate that they were not able to take on any new capital projects at the present time. They also indicated that they had some other projects under consideration and would be in a position to make other capital investments later in the year.

Please answer the following:

A) Why do you think that Midwest Metalwerks division management turned down the proposal for the capital investment project? Support your reasoning with calculations.

B) What if Alter corporation used residual income to evaluate divisional performance? Would this have changed Middwest Metalwerks' response to the investment proposal? Provide computations.

C) Would it be possible for Alter Corporation to use both ROI and RI to evaluate divisional performance? How would Alter use both of these metrics?