Question

Herb Huskie currently has an ROI of 16%, average operating assets of $1,500,000 and NOI of $240,000. The minimum required rate of return is 10%. Huskie can make an investment of $250,000 for a new project that would generate a NOI of $30,000. Using residual income, would Huskie make this investment?
a) Yes, the new project would have a ROI of 12%.b) Yes, the new project would have a ROI of 16%.c) No, the new project would have a ROI of 12%.d) No, the new project would have a ROI of 16%.

Answer 1

Answer:

c. No, the new project would have a ROI of 12%

Explanation:

Given that

NOI from new project = $30,000

Investment for a new project = $250,000

Using residual income the Huskie make this investment is shown below:-

Lower than current = NOI from new project ÷ Average operating Assets or Investments

= $30,000 ÷ $250,000

= 12%

No, the new project would have a ROI of 12%