Suppose a division of a company is treated as an investment center. The division manager is currently getting an ROI of 15 percent from existing assets of €1 million.

The cost of capital (corporate discount rate) is 10 percent. The manager has the option of choosing among the following projects, which are independent of existing operations and the other alternative projects.

a. Given the current investment in existing assets, in which additional projects should the division manager invest if the objective is to maximize ROI?

b. Which projects yield a positive net present value?

c. Which projects have a negative residual income?

d. Using this example, explain why under-investment is a problem when using ROI for evaluation purposes.

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Project Investment ROI 14% ABCDE 100,000 400,000 200,000 20 14 300,000 12 500,000 8