Paula Boothe, president of the Grouper Corporation, has mandated a minimum 13% r
ID: 2557806 • Letter: P
Question
Paula Boothe, president of the Grouper Corporation, has mandated a minimum 13% 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 13%. 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 $225,000 in operating income.
Paula Boothe, president of the Grouper Corporation, has mandated a minimum 13% 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 13%. 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 $225,000 in operating income.
Explanation / Answer
Return on investment expected on the new line of energy drinks
Operating income to get generate = $225,000
Total Investment = $1,800,000
Therefore, Return on Investment = Operating Income/Investment = $225,000/$1,800,000 = 12.5%
If Martin Koch is evaluated based on the division’s return on investment, will he choose to invest in the new line? No
Basis division's return on Investmnets, Martin Koch has achieved a 16% return on Investment for the past three years and is expecting the same for this year as well. hat means his expectation would be around 16% from any new investments that he may think of.
Since the new line of energy drinks is giving a return of just 12.5% which is less than the minimum required return of 16%. Considering this he will not choose to invest into this new line.
Would Paula Boothe prefer that Martin Koch invest in the new line?
Paula has already mandated a minimum 13% return on Investment for any project undertaken by the company, Whereas this new line is giving just 12.5% of return. Considering this, Paula will also not prefer to invest in the new line.