Fiona Berling's division of McSystems generates a net operating profit after tax, or NOPAT, of $1 million

Question:

Fiona Berling's division of McSystems generates a net operating profit after tax, or NOPAT, of $1 million on an invested capital base of $1 million. The weighted average cost of capital of Ms. Berling's division is 20 percent. The division has been asked to launch a new investment project that would return $500,000 for an investment of $1 million.

a. If bonuses at McSystems were based on return on invested capital achieved by its divisions, would Ms. Berling find the new project acceptable?

b. What if the bonuses were based on economic value added achieved by its divisions?

c. What bonus system would you favor? Why?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...