Question

Edith Blevins, the president of RAM Corp., requires a minimum return on investment (ROI) of 10% on any new projects at her company. Managers at RAM Corp. have the authority to make investment decisions for their divisions. Malik Verdon, manager of the Semiconductor Division, has had a ROI of 14% for his division for the past two years and expects to earn a similar ROI this year. Malik has the opportunity to invest in a new line of semiconductors, which he expects to generate a profit of $180,000 this period on an investment of $1,500,000. If RAM Corp evaluates performance based on return on investment, then which of the following statements about this investment opportunity is true? Edith and Malik will both prefer to accept

Edith will prefer to accept, Malik will prefer to reject

Edith will prefer to reject, Malik will prefer to accept

Edith and Malik will both prefer to reject

Answer 1

Answer is (b) Edith will prefer to accept, Malik will prefer to reject

company expects to generate a profit of $180,000 this period on an investment of $1,500,000

Return on investment = (Profit/Investment)*100

= (180000/1500000)*100 = 12%

Edith Blevins, the president of RAM Corp., requires a minimum return on investment (ROI) of 10% on any new projects at her company. Here this project gives the company 12% ROI. So, Edith will prefer to accept this project.

Since Managers at RAM Corp. have the authority to make investment decisions for their divisions he also have preference. He expect a ROI of 14%. There for he will prefer to reject.