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This year division D achieved a ROCE of 24% and the divisional manager received a large bonus.
The manager is considering an investment in a new machine for next year. The incremental ROCE earned by the machine is expected to be 19% although the ROCE for the division as a whole with the machine is expected to be 22%. Without the machine, ROCE is likely to be stable at 24%.
The cost of capital for the company as a whole is 18% per year.
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C. The manager will reject the investment because it will result in the receipt of no bonus.
D. The manager will accept the investment because overall the division will earn a ROCE that exceeds the minimum target of 20%.
Answer: A
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