Paula Boothe, president of the Sheffield Corporation, has mandated a minimum 13%

Question

Paula Boothe, president of the Sheffield 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 13% 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 $207,000 in operating income.

Explanation / Answer

Return on investment = Operating income/Operating assets = 207000/1800000= 11.5%

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