Paula Boothe, president of the Armange Corporation, has mandated a minimum 11% r

Question

Paula Boothe, president of the Armange Corporation, has mandated a minimum 11% return on investment for any project undertaken by the company. Given the company's decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 11%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 16% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,800,000 in a new line of energy drinks that is expected to generate $205,000 in operating income. Calculate the return on investment expected on the new line of energy drinks.

Explanation / Answer

Details Amt $ Net Operating Income from new line                     205,000 Investment required in new line =                 1,800,000 ROI =205000/1800000= 11.39% So Return on investment on new line of energy drink is 11.39%

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