Campbell Company is a decentralized organization with several autonomous divisions.

Operating results for the Wales Division for 2019 are budgeted as follows:

Sales =$5,000,000

Variable costs =$2,500,000

Fixed costs =$1,800,000

Operating assets(investment)=$3,600,000

For 2019, the division can add a new product line for an investment of $1,080,000. The new product line will generate additional sales of $1,600,000 and will incur additional fixed expenses of $400,000 annually. Variable costs of the new product will average 60% of the selling price.

The cost of capital is 13%.

Required:

1. Using the above information, calculate a financial performance measure that potentially induces (i.e., creates) the under-investment problem.

2. Regardless of your answer above, calculate a performance measure that potentially mitigates (i.e., reduces) the aforementioned underinvestment problem.