Nielsen Ltd has two divisions with the following information:

	Division A	Division B
	$	$
Profit	90,000	10,000
Capital Employed	300,000	100,000
ROI	30%	10%

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 companys 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)?

(3 marks)

(b) What should the managers do if they act in the best interests of the

company as a whole?

(2 marks)

Total (5 marks pro-rated as per course guide)

Note the following:

In part (a), 1 mark is for the calculation and 2 marks for discussion.

In part (b), 2 marks are for discussion.