Lake Forest Electronics Company paid $7 million in cash 4 years ago to acquire a company that manufactures CD-ROM drives. This company has been operated as a division of Lake Forest and has lost $500,000 each year since its acquisition.
The minimum desired return for this division is that, when a new product is fully developed, it should return a net profit of $500,000 per year for the foreseeable future. Recently, the IBM Corporation offered to purchase the division from Lake Forest for $5 million.
The president of Lake Forest commented, “I’ve got an investment of $9 million to recoup ($7 million plus losses of $500,000 for each of 4 years). I have finally got this situation turned around, so I oppose selling the division now.”
Prepare a response to the president’s remarks. Indicate how to make this decision. Be as specific as possible.