Question

Walk Warren is president of the Philadelphia Freedom Corporation. The company is decentralized and leaves investment decisions up to the discretion of the division managers. John Legend, manager of one of the divisions, 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. John has the opportunity to invest in a new product which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%.

Suppose the company evaluates managerial performance using return on investment. What action would each of them prefer with respect to the decision of whether to take on the new product?

	Warren	John
A)	accept	reject
B)	reject	accept
C)	accept	accept
D)	reject	reject

Group of answer choices

Choice A

Choice D

Choice B

Choice C

Answer 1

Choice A is correct (Warren: Accept, John: Reject)

Reason:

From Warren point of view (Accept the new product)

Since the company's minimum required rate of return is 8% and the new product is expected to have a return on investment of 12% Therefore as a company point of view this new product should be accepted.

From Johns point of view (Reject the new product)

Since John's division had a return on investment of 14% for the past three years and he expects the division to have the same return in the coming year. Therefore he should not accept the new product providing return of 12% because accepting this product will reduce his division return from 14%