The manager of a division that produces electronic audio products is considering the op¬

portunity to invest in two independent projects. The first is a waterproof CD player for use in the shower or at poolside. The second, called the "audio belt," is a tape player encased in a belt for joggers. Without the investments, the division will have average assets for the coming year of $18 million and expected operating income of $2.7 million. The expected op¬

erating mcomes and the outlay required for each investment are as follows:

Corporate headquarters has made available up to $2 million of capital for this division.
Any funds not invested by the division will be retained by headquarters and invested to earn the company's minimum required rate, 10%.
Required:
1. Compute the ROI for each investment.
2. Compute the divisional ROI for each of the following four alternatives:

a. The CD player is added.

b. The audio belt is added.

c. Both investments are added.

d. Neither investment is made; the status quo is maintained.
Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?

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Operating income Outlay CD Player Audio Belt $ 97,500 800,000 750,000 $100,000