Case 13-50 ROI versus Residual Income; Incentive Effects (LO13-1, 13-2, 13-4, 13-8) Holiday Entertainment Corporation (HEC), a subsidiary of New Age Industries, manufactures go-carts and other recreational vehicles. Family recreational centers that feature not only go-cart tracks but miniature golf, batting cages, and arcade games as well have increased in popularity. As a result, HEC has been receiving some pressure from New Age's management to diversify into some of these other recreational areas. Recreational Leasing, Inc. (RLI), one of the largest firms that leases arcade games to family recreational centers, is looking for a friendly buyer. New Age's top management believes that RLI's assets could be acquired for an investment of $3.2 million and has strongly urged Anastasia Grieco, division manager of HEC, to consider acquiring RLI. Grieco has reviewed RLI's financial statements with HEC's controller, Marie Donnelly, and they believe the acquisition may not be in the best interest of HEC. "If we decide not to do this, the New Age people are not going to be happy," said Grieco. "If we could convince them to base our bonuses on something other than return on investment, maybe this acquisition would look more attractive. How would we do if the bonuses were based on residual income, using the company's 15 percent cost of capital?"