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    This document contains financial information for a company over 4 years, including sales, costs, profits, capital employed, return on investment (ROI), and net present value (NPV) calculations. It analyzes whether a manager named Maguire would likely accept a proposed investment based on his goal of maximizing his own interests. It finds that Maguire is unlikely to accept the investment as it would reduce his division's average ROI, even though the NPV calculation shows the project would increase shareholder wealth. Key factors that influence Maguire's decision versus the overall wealth creation are the time horizon and isolation of project-level versus average ROI impacts.

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    This document contains financial information for a company over 4 years, including sales, costs, profits, capital employed, return on investment (ROI), and net present value (NPV) calculations. It analyzes whether a manager named Maguire would likely accept a proposed investment based on his goal of maximizing his own interests. It finds that Maguire is unlikely to accept the investment as it would reduce his division's average ROI, even though the NPV calculation shows the project would increase shareholder wealth. Key factors that influence Maguire's decision versus the overall wealth creation are the time horizon and isolation of project-level versus average ROI impacts.

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    6 views10 pages

    QN20 Presantation

    Uploaded by

    Jeremiah Ncube
    This document contains financial information for a company over 4 years, including sales, costs, profits, capital employed, return on investment (ROI), and net present value (NPV) calculations. It analyzes whether a manager named Maguire would likely accept a proposed investment based on his goal of maximizing his own interests. It finds that Maguire is unlikely to accept the investment as it would reduce his division's average ROI, even though the NPV calculation shows the project would increase shareholder wealth. Key factors that influence Maguire's decision versus the overall wealth creation are the time horizon and isolation of project-level versus average ROI impacts.

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    © All Rights Reserved
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    of 10

    CHIWARA PRUDENCE: C20142991I

    NYAGADZA TAFADZWA: C20141272U

    QUESTION 20
    Return On Investment

    ROI FOMULAE = PROFIT X 100

    CAPITAL EMPLOYED
    Y1 ,Y2,Y3 Y4

    Sales (15000*18) 270,000.00 270,000.00

    Variable cost (15000*12) (180,000.00) (180,000.00)

    Fixed cost (excl dpn) (50,000.00) (50,000.00)

    Depreciation (1000000/4) (25,000.00) (25,000.00)

    Gain on disposal - 20,000.00

    Profit 15,000.00 35,000.00


    CAPITAL EMPLOYED

    Y1 Y2 Y3 Y4

    Fixed cost @ the beg of the year 100,000.00 75,000.00 50,000.00 25,000.00

    Working capital 50,000.00 50,000.00 50,000.00 50,000.00

    Total Capital employed 150,000.00 125,000.00 100,000.00 75,000.00


    Return On Investment

    Y1 Y2 Y3 Y4

    ROI (Profit/Capital employed *100) 10% 12% 15% 47%


    EXPLAIN WHETHER OR NOT MAGUIRE IS LIKELY TO ACCEPT THE PROPOSED INVESTMENT ASSUMING HE ACTS TO MAXIMISE HIS OWN
    INTEREST ?

    Maguire is unlikely to accept the proposed investment

    His division earns 15% in the absence of the proposed investment

    Accepting will reduce average ROI during timeframe of Maguire's intended remaining employment with the company
    CASHFLOWS

    Description Y0 Y1 ,Y2,Y3 Y4

    Operating cash flows (270000+180000+50000) 40,000.00 40,000.00

    Purchase and sale of fixed asset 100,000.00 20,000.00

    Working capital 50,000.00 50,000.00

    Net Cashflow 150,000.00 40,000.00 110,000.00


    NET PRESENT VALUE

    Net Present Value @10%

    = -150000+(40000*2.487)+(110000*0.683)

    = 24,610.00
    C EXAMPLES
    1 ROI includes depreciation charge ,NPV calculations do not because depreciation is not a cash flow

    2 ROI is a year by year calculation ,so the manager's reaction to it depends on his time horizon

    E.g. Maguire does not plan to stay long enough with Fanago Manufacturing for the high ROI in year 4 to be of any benefit to him

    By contrast NPV involves evaluating a project over its whole life

    3 NPV calculations enable a project to be judged in isolation .

    It is possible to see whether (as in this case )the project would increase shareholder's wealth

    By contrast managers tend to react to the ROI of an individual project in terms of how it will affect their division average ROI and how this can lead to
    dysfunctional decisions

    E.g. Maguire is likely to accept this project because it will reduce his existing high average ROI
    THANK
    YOU

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