Multinational Manufacturing, INC. Multinational Manufacturing, Inc. (MMI)is a large manufacturing firm engaged in the production and sale of a widely diversified group of products in several countries throughout the world. Some product lines enjoy outstanding success in new fields developed on the basis of an active research and development program; other product lines, whose innovative leads have disappeared, face very severe competition. Each domestic product line and foreign affiliate is a separate profit center. Headquarters influences these centers primarily by evaluating their managers based on certain financial criteria, including return on investment, return on sales and growth in earnings. Division and affiliate executives are held responsible for planning and evaluati possible new projects. Each project is expected to yield at least 15%. Projects requiring an investment below $250,000(about one-third of the projects) are approved at the division or affiliate level without formal review by headquarters management. The present cutoff rate was established three years ago as part of a formal review of capital budgeting procedures. The conclusion at that time was that the company's weighted average cost of capital was 15%,and it should be applied when calculating net present values of proposed projects. In announcing the policy, Mr. Thomas Black, Vice President-Finance, said, "It's about time that we introduced some modern management techniques in allocating our capital resources. Now Mr. Black is concerned that the policy introduced three years ago is having some unintended consequences. Specifically, top management gets to review only obvious investment candidates. Low-risk, low-return projects and high-risk, high- return projects seem to be systematically screened out along the way. The basis for this screening is not entirely clear, but it appears to be related to the way in which managerial performance is evaluated. Local executives seem to be concerned that low- potential projects will hurt their performance appraisal, while high-potential projects can turn out poorly. The president of one foreign affiliate said privately when asked why he never submitted projects at the extremes of risk and return, "Why should I take any chances? When headquarters says it wants 15%, it means 15%and nothing less. My crystal ball isn't good enough to allow me to accurately estimate sales and costs in this country, especially when I never know what the government is going to do." QUESTIONS: Make recommendations to Mr. Black concerning the following points: 1.Should MMI lower the hurdle rate in order to encourage the submission of more proposals, or should it drop the hurdle rate concept completely? 2.Should MMI invest in lower-return projects that are less risky and/or in high-risk projects that appear promising? What is the relevant measure of risk? 3. Why are projects at the extremes of risk and return not reaching top management for review?