Question
Two division managers in NLH, Inc. are individually considering whether to invest in a new product. Before the investment, the Wales division manager earns an
Two division managers in NLH, Inc. are individually considering whether to invest in a new product. Before the investment, the Wales division manager earns an average return on investment of 11%. The Campbell division manager earns an average of 9.5%. Managers are compensated based on improving return on investment.
Projected profit from the investment is $20,000. The investment required for the project is $200,000.
The cost of capital at NLH, Inc. has been set by upper management at 10.5%.
Which manager(s) will exhibit behavior consistent with the underinvestment problem?
A. Only the Wales division manager
B. Only the Campbell division manager
C. Both division managers
D. Neither division manager
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