Quick Managerial Accounting question

[mazeroth]

None of these answers seem to be correct to me, no matter how much I dig into them. Any help is greatly appreciated!

If a manager is evaluated based on ROI, and is managing a division which has attained a high ROI, the manager:

-may not want to invest in projects that have an ROI that is higher than the
firm's cost of capital, but lower than the division's ROI.

-should invest in projects that have an ROI lower than the firm's cost of capital.

-should only consider projects that have a negative NPV.

-may prefer to invest in projects that have an ROI that is very close to the firm's cost of capital.

 

[overst33r]

42. Final answer Regis.

 

[FelixDeCat]

Youre right, this is a trick question, but I think D makes the most sense since the divisions cost of cap might not be the same as the firms cost of cap.

 

[mb]

It's either A or D, but the whole problem is so poorly worded that I don't know.

"-may prefer to invest in projects that have an ROI that is very close to the firm's cost of capital." It doesn't tell you if by close if they mean slightly over or slightly under the cost of capital.

 

[mazeroth]

mb, tell me about it. This professor is something else. I'm almost tempted to go to the dean about her. Any last minute suggestions on this one before I "guess" D?

 

[TheoPetro]

I would go with A because even though the project's ROI would be higher than the firm's cost of capital (the question should have used "required return" NOT cost of capital) it would lower his "bonus" because its lowering his divisions average ROI. Basically taking the project could be beneficial to the firm but it would hurt his pocket

 

[mb]

Originally posted by: TheoPetro
I would go with A because even though the project's ROI would be higher than the firm's cost of capital (the question should have used "required return" NOT cost of capital) it would lower his "bonus" because its lowering his divisions average ROI. Basically taking the project could be beneficial to the firm but it would hurt his pocket

That makes much more sense when you put it that way. I interpreted A a little bit differently.

 

[mazeroth]

Originally posted by: TheoPetro
I would go with A because even though the project's ROI would be higher than the firm's cost of capital (the question should have used "required return" NOT cost of capital) it would lower his "bonus" because its lowering his divisions average ROI. Basically taking the project could be beneficial to the firm but it would hurt his pocket

I can not believe I didn't read it like that. You're absolutely correct. Thank you VERY much! I mean that.

 

[mazeroth]

Well, this was an online quiz and guess what, B was the correct answer. Are you fucking kidding me?

should invest in projects that have an ROI lower than the firm's cost of capital.

WTF!

 

[mb]

Well, professors do have the option of manually creating questions and answers and selecting the "right" answer on the online quizzes instead of selecting from the quiz bank.
She must have messed up somewhere because B is completely the wrong answer.

 

[looker001]

Originally posted by: mazeroth
Well, this was an online quiz and guess what, B was the correct answer. Are you fucking kidding me?

should invest in projects that have an ROI lower than the firm's cost of capital.

WTF!

How in the world it's B? Call the professor and tell him/her that they marked wrong answer.

 

[Darthvoy]

Originally posted by: mb
Well, professors do have the option of manually creating questions and answers and selecting the "right" answer on the online quizzes instead of selecting from the quiz bank.
She must have messed up somewhere because B is completely the wrong answer.

yup, there is no way B is the right answer.

 

[shoRunner]

A should be the right answer; its definately not B. (managerial science major...if that matters)

 

[kranky]

Originally posted by: shoRunner
A should be the right answer; its definately not B. (managerial science major...if that matters)

I'm late to this thread but I completely agree with this. No way in the world can it be "B".

 

[TheoPetro]

Originally posted by: mazeroth

Originally posted by: TheoPetro
I would go with A because even though the project's ROI would be higher than the firm's cost of capital (the question should have used "required return" NOT cost of capital) it would lower his "bonus" because its lowering his divisions average ROI. Basically taking the project could be beneficial to the firm but it would hurt his pocket

I can not believe I didn't read it like that. You're absolutely correct. Thank you VERY much! I mean that.

No problem. Thats what Finance majors are for.

 

[Kntx]

Originally posted by: looker001

Originally posted by: mazeroth
Well, this was an online quiz and guess what, B was the correct answer. Are you fucking kidding me?

should invest in projects that have an ROI lower than the firm's cost of capital.

WTF!

How in the world it's B? Call the professor and tell him/her that they marked wrong answer.

The argument could be that the opportunity to invest in these projects only exists when the division has a high ROI.

 

[darkxshade]

The correct answer is to ask for a bailout

 

[halik]

IIRC any project where the ROI is higher than WACC shoud be undertaken, since you're getting higher return than your weighted average risk. If you raise capital at 15% and can invest in project that makes 17% you're making money on the spread.

<- Finance Master's

 

[halik]

Originally posted by: mazeroth
Well, this was an online quiz and guess what, B was the correct answer. Are you fucking kidding me?

should invest in projects that have an ROI lower than the firm's cost of capital.

WTF!

That cannot be correct, are you sure the question wasn't "which one is FALSE"?

 

[TheoPetro]

Originally posted by: halik
IIRC any project where the ROI is higher than WACC shoud be undertaken, since you're getting higher return than your weighted average risk. If you raise capital at 15% and can invest in project that makes 17% you're making money on the spread.

<- Finance Master's

What company's required rate of return is 2%? Thats why I said it should not use the WACC it should have used the required rate of return. If your ROI is 2% above the WACC thats a pretty shitty return. Might as well just invest all your $ in T-bills. So the statement that "any project where the ROI is higher than WACC shoud be undertaken" is not always true. I know im being technical but for these classes thats what they require.

 

[tefleming]

Originally posted by: mazeroth
If a manager is evaluated based on ROI, and is managing a division which has attained a high ROI, the manager:

-may not want to invest in projects that have an ROI that is higher than the
firm's cost of capital, but lower than the division's ROI.

This is true, as it would lower the divisions total ROI

-should invest in projects that have an ROI lower than the firm's cost of capital.

no

-should only consider projects that have a negative NPV.

no

-may prefer to invest in projects that have an ROI that is very close to the firm's cost of capital.

no, always want ROI>cost of capital (close isn't good.)