1.

A company has set a target ROI of 12% for its division, this is deemed to represent the
return necessary to benefit the company. Division D achieved and ROI of 17% last year
and it is not expecting any major change from ongoing operations. The purchase of a
new piece of equipment has been proposed by a member of the production team. It is
estimated that it will boost profits by Rs. 128,000 per annum for an investment of
Rs.855,000. Is the divisional manager likely to accept or reject the investment? Will this
be able to the benefit or the detriment of the company?

2. A company has set a target ROI of 14% for its division, this is based on the company’s
COC. Division D achieved an ROI of 8% last year and is not expecting any major change
from ongoing operations. However, a manager has suggested that cost savings of
Rs.15,000 per annum can be obtained by investing Rs.135,000 in upgrading a particular
piece of equipment. Is the divisional manager likely to accept or reject the investment?
Will this be to the benefit or the detriment of the company?

3. A company uses ROI to assess divisional performance, but it is considering switching to

RI. The company COC is 15%. Division C has an ROI of 21% which is not expected to
change. An investment of Rs.155,000 is available, which is expected to yield a profit of
Rs.28,000 per annum. Is the manager of division C likely to accept or reject the
investment if ROI is used to assess performance? Would this change if RI was used?

4. A company has the following balance sheet totals at the end of its most recent financial
year;

Rs in million
Non-current assets 3.64
Current assets 0.42
Share capital and reserves* 2.69
Long-term debt 1.00
Current liabilities 0.37

*includes retained profit for the year of Rs.320,000 after deducting:

Ordinary share dividends - Rs.200,000
Interest on long-term debt - Rs.100,000
Taxation – Rs.70,000

Calculate the ROI of the company for the year.

5. A division of a company has capital employed of Rs. 2 million and its return on capital is
12%. It is considering a new project requiring a capital of Rs.500,000 and it is expected

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 to yield profits of Rs.90,000 per annum. The company’s interest rate is 10%. If the new
project is accepted, the residual income of the division will be?

6. An investment centre has earned an accounting profit of Rs.135,000, after charging

historical cost depreciation of Rs.22,000 and increasing the provision for doubtful debts
by Rs.8,000 to Rs.12,000. If the non-current assets had been valued at replacement cost
the depreciation charge would have been Rs.41,000.

The net book value of the investment centre’s net assets is Rs.420,000 and the
replacement cost is estimated to be Rs.660,000. The organization’s risk-adjusted COC is
14% but it has a large bank loan which incurs an annual interest charge of 10%.
Calculate EVA for the investment centre (ignore tax).

7. Division G has reported annual operating profits of Rs.20.2 million. This was after
charging Rs.3 million for the full cost of launching a new product that is expected to last
three years. Division G has a risk adjusted COC of 11% and is paying interest on a
substantial bank loan at 8%. The historical cost of assets in division G, as shown on its
balance sheet, is Rs.60 million, and the replacement cost has been estimated at Rs.84
million. Calculate the EVA for division (ignore tax).

8. Division M has produced the following results in the last financial year:

Rs.’000

Net profit 360

Capital Employed Non-current assets 1,500
Net current assets 100

For evaluation purposes all divisional assets are valued at original cost.
The division is considering a project which will increase annual net profit by Rs.25,000
but will require average inventory levels to increase by Rs.30,000 and non-current assets
to increase by Rs.100,000. There is an 18% capital charge on investment. Given these
circumstances, will the evaluation criteria of ROI and RI motivate Division M
management to accept this project?