Question 3

Sigma Ltd provides the following data for its two divisions:

Alpha Division

Beta Division

Net operating profit

$1,750,000

$10,000,000

Total assets

$10,750,000

$35,690,000

The company's required rate of return is 19%.

Required:

a)Calculate return on investment for each division

b)Both divisions have been required to consider investing in a new line of business requiring an investment of $11,900,000 which is likely to realise a profit of $2,100,000. If each manager's performance is based on ROI, will both managers accept the new investment?

c)Should the investment be accepted? Explain why?