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 10.5%. 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 9.5%.
Which manager(s) will exhibit behavior consistent with the underinvestment problem?
Only the Campbell division manager
Neither division manager
Only the Wales division manager
Both division managers
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