Paula Boothe, president of the Armange Corporation, has mandated a minimum 10% 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 12%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 18% 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 $2,000,000 in a new line of energy drinks that is expected to generate $320,000 in operating income.
Required
a. Calculate the return on investment expected on the new line of energy drinks.
b. If Martin Koch is evaluated based on the division’s return on investment, will he choose to invest in the new line? Why or why not?
c. Would Paula Boothe prefer that Martin Koch invest in the new line? Why?
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