Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves investment decisions up to the discretion of the division managers. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return of 8%, what decision would be preferred by Edith Carolina and Michael Sanders?
$\begin{array}{lll}
& \text { Carolina } & \text { Sanders } \
\text { A) } & \text { accept } & \text { reject } \
\text { B) } & \text { reject } & \text { accept } \
\text { C) } & \text { accept } & \text { accept } \
\text { D) } & \text { reject } & \text { reject }
\end{array}$

Question

Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves investment decisions up to the discretion of the division managers. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return of 8%, what decision would be preferred by Edith Carolina and Michael Sanders?
$\begin{array}{lll}
 & \text { Carolina } & \text { Sanders } \
\text { A) } & \text { accept } & \text { reject } \
\text { B) } & \text { reject } & \text { accept } \
\text { C) } & \text { accept } & \text { accept } \
\text { D) } & \text { reject } & \text { reject }
\end{array}$

Quizplus · Accepted Answer

Residual income evaluates investments based on the income generated above a minimum required return. Since the new project's return of 12% exceeds the corporate minimum of 8%, it would increase the company's overall residual income, making it a preferred decision for both Edith Carolina and Michael Sanders.

Edith Carolina Is President of the Deed Corporation A) Choice a B) Choice B C) Choice C D)

Edith Carolina Is President of the Deed Corporation A) Choice a
B) Choice B
C) Choice C
D)