McNeil’s proposal should have been accepted because:
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The ROA for the new product is higher than the current ROA for the Consumers
Division’s of 10.8%
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13% is higher than the current ROA of the company as a whole (9.4%).-
It is higher than the hypothetical 12% ROA set by Hubbard that covers interest costs of borrowing capital.-
If EVA is calculated instead, the residual income is positive.EVA = Net Income
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(Cost of Capital x Investment)= 390,000
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(12% x 3,000,000)= 30,000