Question

Assume a company's threshold rate of return is 14%. The top division in the company has a current ROI of 18% and has been offered an investment that offers a return of 15%. Which of the following statements are true?

Option 1:
The Investment Should Be Accepted

Option 2:
The Investment Should Be Rejected

Option 3:
The Investment's Return Exceeds the Threshold

Option 4:
The Investment's Return is Below the Threshold

Answer 1

The correct statements are that the investment's return exceeds the 14% threshold, which might lead to its acceptance. However, the decision would also consider that the investment offers a lower ROI than the division's current 18%, potentially justifying its rejection.

Step-by-step explanation:

When evaluating investment decisions, it's crucial to compare the potential return on investment (ROI) against the company's threshold rate of return. In this case, the company's threshold rate of return is 14%. The top division currently has a ROI of 18% and is considering an investment with a 15% return. Comparing this to their threshold:

• Option 3 is true: The Investment's Return Exceeds the Threshold.
• Option 1 might be considered true: The Investment Should Be Accepted, because it exceeds the threshold rate, but it's not higher than the division's current ROI, which might influence the decision.
• Option 2 might be considered true: The Investment Should Be Rejected, if the goal is to maintain or improve the division's current ROI.
• Option 4 is false: The Investment's Return is not Below the Threshold.

Thus, while the investment does have a return above the company's minimum requirement, accepting it could lead to a lower overall ROI for the division, which should be factored into the decision-making process.