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10-B1 ROI or Economic ProfitPerth Co. is a large integrated Australian conglomerate with shipping, metals, and mining operationsthroughout Asia. The general manager of the Mining Division plans to submit a proposed capital budgetfor 20X8 for inclusion in the companywide budget.The division manager has for consideration the following projects, all of which require an outlayof capital. All projects have equal risk.Project Investment Required Return1 $4,800,000 $1,200,0002 1,900,000 627,0003 1,400,000 182,0004 950,000 152,0005 650,000 136,5006 300,000 90,000The division manager must decide which of the projects to take. The company has a cost of capital of15%. An amount of $12 million is available to the division for investment purposes.1. What will be the total investment, total return, return on capital invested, and economic profit ofthe rational division manager ifa. The company has a rule that managers should accept all projects promising a return on investmentof at least 20%.ISBN: 0-536-47129-0Introduction to Management Accounting: Chapters 1-17, Fourteenth Edition, by Charles T. Horngren, Gary L. Sundem, William O. Stratton,David Burgstahler, and Jeff Schatzberg. Published by Prentice Hall. Copyright © 2008 by Pearson Education, Inc.Chapter 10: Management Control in Decentralized Organizations 457b. The company evaluates division managers on their ability to maximize the return on capitalinvested (assume that this is a new division with no invested capital).c. The division manager is expected to maximize economic profit as computed by using the 15%cost of capital.2. Which of the three approaches will induce the most effective investment policy for the companyas a whole? Explain.
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