Axel Corporation (which has a weighted-average cost of capital of 12%) has two divisions with the following information:
Total Assets = $720,000 (Beta Division), $550,000 (Cal Division)
Current Liabilities = $220,000 (Beta Division), $110,000 (Cal Division)
After-Tax Operating Income = $105,000 (Beta Division), $110,000 (Cal Division)
ROI = 15% (Beta Division), 20% (Cal Division)
Each manager is offered an investment project opportunity that would increase each division's investment base by $10,000 and generate an additional profit for each division of $1,800. Which of the following is true?
Multiple Choice
A. If the managers are evaluated based on their divison's ROI, Beta would accept the project but Cal would reject it.
B. If the managers are evaluated based on their divison's ROI, Cal would accept the project but Beta would reject it.
C. If the company rewards managers for accepting any project with positive residual income, and the company's target return for projects is 20%, both division managers would accept the project.
D. If the compay rewards managers for accepting any project with positive residual income, and the company's target return for projects is 15%, both division managers would reject the project.