Brooke Bundi, president of the Seco Corporation, has mandated a minimum 10% return on investment for any project undertaken by the company.Given the company's decentralization, Brooke leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 12%.The Flavored Water division, under the direction of manager Karl Martin, has achieved a 14% return on investment for the past three years.This year is not expected to be different from the past three.Martin has just received a proposal to invest $1,700,000 in a new line of flavored water that is expected to generate $221,000 in operating income.
Required:
a.Calculate the residual income for the proposed new line of flavored water.
b.If Karl Martin is evaluated based on residual income, will he choose to invest in the new line of flavored water? Why or why not?

Question

Quizplus · Accepted Answer

The Answer of Brooke Bundi, president of the Seco Corporation, has mandated a minimum 10% return on investment for any project undertaken by the company.Given the company's decentralization, Brooke leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 12%.The Flavored Water division, under the direction of manager Karl Martin, has achieved a 14% return on investment for the past three years.This year is not expected to be different from the past three.Martin has just received a proposal to invest $1,700,000 in a new line of flavored water that is expected to generate $221,000 in operating income.
Required:
a.Calculate the residual income for the proposed new line of flavored water.
b.If Karl Martin is evaluated based on residual income, will he choose to invest in the new line of flavored water? Why or why not?

Brooke Bundi, President of the Seco Corporation, Has Mandated a Minimum