Brady Division Has Operating Income of $200,000 for the Year

question 99

Multiple Choice

Brady Division has operating income of $200,000 for the year ending December 31,2011.Average invested capital is $1,000,000 and the weighted-average cost of capital is 10%.The division is considering a new investment that would cost $500,000 and earn 15% annually.If return on investment is the performance metric,should the manager of the Brady Division accept the new investment?

• A) No, because the return on investment of the division decreases with the new investment.
• B) No, because the return on investment of the division increases with the new investment.
• C) Yes, because the return on investment of the division decreases with the new investment.
• D) Yes, because the return on investment of the division increases with the new investment.

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Definitions:

Derivative Financial Instrument

is a financial contract whose value is based on the performance of underlying assets, indices, or interest rates, used for speculation, hedging, or risk management.

Option

A financial instrument that gives the holder the right to buy or sell a certain number of shares or debentures in a company by a specified date at a stipulated price.

Shares

Shares represent portions of equity in a company or financial asset, entitling holders to a proportional share of profits through dividends, when declared.