Paula Boothe, president of the Grouper Corporation, has mandated a minimum 6% return on investment for any project undertaken by the company. Given the company's decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 8%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 15% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,990,000 in a new line of energy drinks that is expected to generate $225,800 in operating income.

(a) Calculate the residual income for the proposed new line of energy drinks.

Residual income

$

(b)

If Martin Koch is evaluated based on residual income, will he choose to invest in the new line of energy drinks?