Question
The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation's minimum required return on new projects is 18%.
The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation's minimum required return on new projects is 18%. The US division of the corporation is considering an investment of $70,000 in a project that will generate a net income of $15,000. The US division currently earns a return on investment of 20%. The US division manager can be evaluated either on Return on Investment or division's residual income. Which of the following is true?
A) The US division manager would invest in new project only if division's ROI is used for evaluating manager
B) The US division manager would invest in new project only if residual income is used for evaluating the division manager
C) The US division manager would always invest in new project whether ROI or residual income is used for evaluating the division manager.
D) The US division manager would never invest in the new project whether the division's ROI or residual income is used for evaluation of division manager
E) NONE
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