The Jewelry Division of Genuine Gems Company is considering an investment in a new project. The project has an estimated cost of $1,000,000 . If Genuine Gems Company has a target rate of return of 12%, how large does the return on investment on this project need to be to generate $150,000 of residual income?
a. 15%
b. 12%
c. 25%
d. 27%
D
(ROI ? Total Assets) - (Target Rate ? Total Assets) = Residual Income
(ROI ? $1,000,000) - (0.12 ? $1,000,000) = $150,000
(ROI ? $1,000,000) = $270,000
ROI = 27%
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