Bellco, a division of Becker International Corporation, is operated under the direction of Antoin Sedatt. Bellco is an independent investment center with approximately $72,000,000 of assets that generate approximately $8,640,000 in annual net income. Becker International has additional investment capital of $12,000,000 that is available for the division managers to invest. Mr. Sedatt is aware of an investment opportunity that will provide an 11 percent annual net return. Becker International’s desired rate of return is 10 percent.

Required

Divide the class into groups of four or five students and then organize the groups into two sections. Assign Task 1 to the first section and Task 2 to the second section.

Group Tasks

1. Assume that Mr. Sedatt’s performance is evaluated based on his ability to maximize return on investment (ROI). Compute ROI using the following two assumptions: Bellco retains its current asset size and Bellco accepts and invests the additional $12,000,000 of assets. Determine whether Mr. Sedatt should accept the opportunity to invest additional funds. Select a spokesperson to present the decision made by the group.

2. Assume that Mr. Sedatt’s performance is evaluated based on his ability to maximize residual income. Compute residual income using the following two assumptions: Bellco retains its current asset base and Bellco accepts and invests the additional $12,000,000 of assets. Determine whether Mr. Sedatt should accept the opportunity to invest additional funds. Select a spokesperson to present the decision made by the group.

3. Have a spokesperson from one of the groups in the first section report the two ROIs and the group’s recommendation for Mr. Sedatt. Have the groups in this section reach consensus on the ROI and the recommendation.

4. Have a spokesperson from the second section report the two amounts of residual income and disclose the group’s recommendation for Mr. Sedatt. Have this section reach consensus on amounts of residual income.

5. Which technique (ROI or residual income) is more likely to result in sub-optimization?