Lake Superior Electronics Company paid $7 million in cash four years ago
to acquire a company that manufactures CD-ROMs. This company operates as
a division of Lake Superior and has lost $500,000 each year since its acquisition.
The minimum desired return for this division is that, when a new product
is fully developed, it should return a net profit of $500,000 per year for the foreseeable
future.
Recently the IBM Corporation offered to purchase the division from Lake
Superior for $4 million. The president of Lake Superior commented, “I’ve got an
investment of $9 million to recoup ($7 million plus losses of $500,000 for each
of four years). I have finally got this situation turned around, so I oppose selling
the division now.”
Prepare a response to the president’s remarks. Indicate how to make this
decision. Be as specific as possible.