Question:
(Decisions based on ROI and RI) Miami Marine uses ROI to evaluate the performance of both its Powerboat and Sailboat Division managers. The following estimates of relevant measures have been made for the upcoming year:
|
Powerboats
|
Sailboats
|
Total Company
|
|
Sales
|
$18,000,000
|
$48,000,000
|
$66,000,000
|
|
Expenses
|
16,200,000
|
42,000,000
|
58,200,000
|
|
Divisional assets
|
15,000,000
|
30,000,000
|
45,000,000
|
Both division managers have the autonomy to make decisions regarding new investments. The Powerboats manager is considering investing in a new asset that would generate a 14 percent ROI; the Sailboats manager is considering an investment that would generate an 18 percent ROI.
a. Compute the projected ROI for each division, disregarding the contemplated new investments.
b. Based on your answer in (a), which manager is likely to actually invest in the additional assets under consideration?
c. Are the outcomes of the investment decisions in (b) likely to be consistent with overall corporate goals? Explain.
d. If the company evaluated the division managers' performances using a residual income measure with a target return of 15 percent, would the outcomes of the investment decisions be different from those described in (b)? Explain.