Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves investment decisions up to the discretion of the division managers. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return of 8%, what decision would be preferred by Edith Carolina and Michael Sanders?
Carolina Sanders
A) accept reject
B) reject accept
C) accept accept
D) reject reject
A. Choice A.
B. Choice B.
C. Choice C.
D. Choice D.

When using the residual income based on a corporate minimum required rate of return, an investment that provides a return higher than the required return should be accepted.

Edith Carolina would therefore accept this investment as it offers an ROI of 12% which is higher than the company required rate of return of 12%.

Michael Sanders would however reject it as it falls short of the 14% ROI that he expects his division to maintain.