Refer to Exercise 10-1 for data. At the end of Year 2, the manager of the Camping Division is concerned about the division’s performance. As a result, he is considering the opportunity to invest in two independent projects. The first is called the “Ever-Tent”; it is a small 2-person tent capable of withstanding the high winds at the top of Mt. Everest. While the market for actual Everest climbers is small, the manager expects that well-to-do weekend campers will buy it due to the cachet of the name and its light weight. The second is a “KiddieKamp” kit which includes a child-sized sleeping bag and a colorful pup tent that can be set up easily in one’s back yard. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows:

Gilliam’s corporate headquarters has made available up to \($1\) 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 of return, 9 percent.
Required:
1. Compute the ROI for each investment.
2. Compute the divisional ROI for each of the following four alternatives:

a. The Ever-Tent is added.

b. The KiddieKamp 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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Ever-Tent Kiddie Kamp Operating income Outlay $ 55,000 500,000 $ 38,000 400,000