A Ltd. is currently considering undertaking the acquisition of one of, or, possibly both of two alternative companies (B Ltd and C Ltd) to further broaden its service offerings. You, the company's financial controller, are given the following information.

	A Ltd.
Sales	$2,500,000
Variable costs	60% of sales
Fixed costs	$   650,000
Invested capital	$1,750,000

If A Ltd. acquires B Ltd., it would expect to increase its profit by 20% and would require an additional capital investment of $250,000. If A Ltd. acquires C Ltd., it would expect to increase its profit by 25% and would require an additional capital investment of $650,000. A Ltd has a minimum required rate of return of 11%.

You are required to provide advice on the investment choices based on the following assumptions (word limit: max 40 lines).

1. Assuming that A Ltd has a strong focus on using Return on Investment (ROI) to measure management's performance and there are sufficient resources to invest in both alternatives, you are required to calculate ROIs of A Ltd. both before and after the acquisition of the respective investment alternatives. You are required to advise if A should acquire B or C or both.

2. Assuming that A Ltd has a strong focus on using Residual Income (RI) to measure management's performance and there are sufficient resources to invest in both alternatives, you are required to calculate RIs of A Ltd. both before and after the acquisition of the respective investment alternatives. You are required to advise if A should acquire B or C or both.

3. Compare your recommendations based on ROI and RI above and explain if ROI or RI should be used in business acquisition decisions from a value maximization perspective.

Answer rating: 100% (QA)

Answer Existing Income Statement 2500000 1500000 Sale Less Variable costs Contribution margin 100000... View the full answer