Cucina Corporation operates using a decentralized organization structure where the two service divisions-the Marche division and the Aversa division-are investment centres. The company requires a minimum rate of return of 8 percent and evaluates all managers on the basis of division ROI. Recently, each division was approached to consider different investment opportunities.
Marche division was asked to consider an investment that requires $600,000 in capital and will provide a return of $60,000. Currently the Marche division has $180,000 in operating income and has $1 million in average operating assets.
Aversa division was asked to consider an investment that requires $800,000 in capital and provides a return of $56,000. Currently the Aversa division has $62,500 in operating income and has $1.25 million in average operating assets.
For Cucina Corporation, all managers are evaluated based upon division income.
Required:
For Marche division:
1. Compute the ROI of the investment.
2. Would the Marche division manager accept the investment? Why or why not? Do you agree with the manager's decision?
For Aversa division:
1. Compute the ROI of the investment.
2. Would the Aversa division manager accept the investment? Why or why not? Do you agree with the manager's decision?
3. What are the advantages and disadvantages of using ROI to evaluate investment opportunities?