Division A has been offered a project costing $\$ 100,000$ and giving annual returns of $\$ 20,000$. Division $B$ has been offered a project costing $\$ 100,000$ and giving annual returns of $\$ 12,000$. The company's cost of capital is $15 \%$. Divisional performance is judged on ROI and the ROI related bonus is sufficiently high to influence the managers' behaviour.

Required:

(a) What decisions will be made by management if they act in the best interests of their division (and in the best interests of their bonus)?

(b) What should the managers do if they act in the best interests of the company as a whole?