Question

Paula Boothe, president of the Novak 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 15% 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 $222,000 in operating income. Calculate the return on investment expected on the new line of energy drinks. (Round answer to 1 decimal place, e.g. 5.1%) Return on Investment % LINK TO TEXT LINK TO VIDEO VIDEO: SIMILAR EXERCISE If Martin Koch is evaluated based on the division's return on investment, will he choose to invest in the new line? LINK TO TEXT LINK TO VIDEO VIDEO: SIMILAR EXERCISE Would Paula Boothe prefer that Martin Koch invest in the new line?

Answer 1

Return on investment (ROI) (222000/1800000) = 12.33%

Yes. Martin Koch will choose to invest in new line

Yes. Paula Boothe will prefer Martin Koch investment in new line