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Answer (D) is correct . A manager who is evaluated on the basis of ROI will tend to reject any capital project with an expected rate of return lower than the division’s current ROI. Thus, the Household Appliances Division manager will reject his/her project (14% < 16%). However, the manager of the Construction Equipment Division will accept the project for his/her division. Residual income is the excess of ROI on a project over a targeted amount equal to an imputed interest charge on invested capital. Thus, anytime the expected return on a project exceeds the cost of capital, a manager judged on residual income will tend to accept it (14% > 12%).

Answer (A) is incorrect because The manager of the Household Appliances Division would not have incentive to undertake the project since it would reduce his average ROI.
Answer (B) is incorrect because The manager of the Construction Equipment Division would have incentive to undertake the project.
Answer (C) is incorrect because The manager of the Construction Equipment Division would have incentive to undertake the project, while the manager of the Household Appliances Division would not have incentive to undertake the project.