Question 4 The Bearing Division operates in the energy sector and consists of a number of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question 4 The Bearing Division operates in the energy sector and consists of a number of business units, nearly all of which are involved in the processing and sale of fossil fuels. The division has been financially very successful in recent years and, because of this the Group has allowed the division manager considerable autonomy. In any year, the size of the division manager's bonus is determined by the extent to which the division's Return on Investment (ROI) exceeds its cost of capital (which is 6%). The ROI is calculated by the Group as the net profit for the year divided by the net book value of the capital invested in the division at the beginning of the year. On the basis of existing activities, it is likely that Bearing Division's net profit next year (2020) will be $340,000 and that the net book value of its assets at 1 January 2020 will be $2,000,000. These figures do not include the effect of a possible new investment by the division in an additional business unit which would be involved in the production and supply of solar energy. This new solar energy business unit (SEBU) would require an additional investment of $230,000 for tangible non-current assets plus $70,000 for working capital which the Group would be willing to finance. The investment would be made, and operations would begin on 1 January 2020. It can be assumed that SEBU would have a five-year life, and that the working capital investment would be recovered in full at the end of that time. The tangible non-current assets would be depreciated on a straight-line basis over the five years with no residual value. It is estimated that the net operating cash flows from SEBU over the five years would be as follows: 2020: $20,000 2021: $60,000 2022: $80,000 2023: $90,000 2024: $120,000 It should be assumed that all of these net operating cash flows would arise on the last day of the year to which they relate. NB: Ignore taxation in answering this question. MRO NOMB Required: (a) Calculate the Return on Investment (ROI) of the new solar energy business unit (SEBU) from year 2020 to year 2024. (12 marks) (b) Is the manager likely to invest in SEBU? Justify your answer fully. (3 marks) (10 marks) (c) Appraise potentially superior alternatives to the existing ROI-based performance evaluation and reward system. MDIST AY2021/22 Sem 2 | UOS Y3 | APC315 4 gaina sopsand In section (c) students should demonstrate both knowledge and understanding of the topic within theoretical viewpoints. The response should attempt to incorporate a discussion through relevant academic discussion, rather than overly describing the model. [25 marks] way www.LON popsanud p Page 7 of 8 suop @LH Question 4 The Bearing Division operates in the energy sector and consists of a number of business units, nearly all of which are involved in the processing and sale of fossil fuels. The division has been financially very successful in recent years and, because of this the Group has allowed the division manager considerable autonomy. In any year, the size of the division manager's bonus is determined by the extent to which the division's Return on Investment (ROI) exceeds its cost of capital (which is 6%). The ROI is calculated by the Group as the net profit for the year divided by the net book value of the capital invested in the division at the beginning of the year. On the basis of existing activities, it is likely that Bearing Division's net profit next year (2020) will be $340,000 and that the net book value of its assets at 1 January 2020 will be $2,000,000. These figures do not include the effect of a possible new investment by the division in an additional business unit which would be involved in the production and supply of solar energy. This new solar energy business unit (SEBU) would require an additional investment of $230,000 for tangible non-current assets plus $70,000 for working capital which the Group would be willing to finance. The investment would be made, and operations would begin on 1 January 2020. It can be assumed that SEBU would have a five-year life, and that the working capital investment would be recovered in full at the end of that time. The tangible non-current assets would be depreciated on a straight-line basis over the five years with no residual value. It is estimated that the net operating cash flows from SEBU over the five years would be as follows: 2020: $20,000 2021: $60,000 2022: $80,000 2023: $90,000 2024: $120,000 It should be assumed that all of these net operating cash flows would arise on the last day of the year to which they relate. NB: Ignore taxation in answering this question. MRO NOMB Required: (a) Calculate the Return on Investment (ROI) of the new solar energy business unit (SEBU) from year 2020 to year 2024. (12 marks) (b) Is the manager likely to invest in SEBU? Justify your answer fully. (3 marks) (10 marks) (c) Appraise potentially superior alternatives to the existing ROI-based performance evaluation and reward system. MDIST AY2021/22 Sem 2 | UOS Y3 | APC315 4 gaina sopsand In section (c) students should demonstrate both knowledge and understanding of the topic within theoretical viewpoints. The response should attempt to incorporate a discussion through relevant academic discussion, rather than overly describing the model. [25 marks] way www.LON popsanud p Page 7 of 8 suop @LH
Expert Answer:
Answer rating: 100% (QA)
a The return on investment ROI for the new solar energy business unit SEBU from year 2020 to yea... View the full answer
Related Book For
Financial Accounting Tools for business decision making
ISBN: 978-0470534779
6th Edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
Posted Date:
Students also viewed these accounting questions
-
On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of principal will be included in the first...
-
Karelian Bear Dog, Inc. had 500,000 shares of common stock and 10,000 shares of 8%, $100 par, preferred stock outstanding on December 31, 2013. The preferred stock is cumulative, nonconvertible...
-
Delhi Company obtains Rs400,000 is cash by signing a July 1. Fredericksons fiscal year ends on September 30. What information should be reported for the note payable in the annual financial...
-
Division S of ABC Company makes a part that it sells to other companies. Data on that part appear below: Selling price on the intermediate market $30 per unit Variable costs per unit $22 per unit...
-
You arc beginning the 2016 audit of Alta Tierra Companys long-term debt, and you determine that the companys long-term note payable requires that it comply with certain financial covenants. The note...
-
Derive Maxwell's relations.
-
Washington Mutual Insurance Company issued an \(\$ 80,000,7 \%, 10\)-vear bond payable at a price of 110 on January 1, 2009. Journalize the following transactions for Washington. Include an...
-
A simply supported beam loaded by two forces is shown in the figure. Select a pair of structural steel channels mounted back to back to support the loads in such a way that the deflection at midspan...
-
Why is the statement of cash flows required as part of the set of external financial statements? What can one learn from the statement of cash flow that cant necessarily be learned from reading the...
-
Ellipses Corp is a small business that operates in Herndon, VA. The company is located at10 Period Lane, Herndon, VA 20170. Its federal Employer Identification Number is 77-7777777, and its...
-
The capital budgeting committee for Laroche Industries is meeting. Laroche Industries is meeting. Laroche is a North American conglomerate that has several divisions. One of these divisions, Laroche...
-
What is the purpose of a minimum-security prison? What type of security does a minimum-security prison offer? If the inmates are considered such a low risk, should such prisons be phased out in favor...
-
Background Facts Young Rodman Young Rodman was born in Australia on 5 August 1985, and has lived in Australia his entire life. Young lives in a large family home with his wife and children. All...
-
Assume that a project requires the purchase of a machine that cost P2 million and will cost P3 million to install. Additional working capital of P150 000 will also be required when the project is...
-
A car with mass M moving at 4.65m/s speed collides with a car twice as massive that is travelling in the same direction but at 1/3 of the first car's speed. If the two vehicles entangled together...
-
There are two definitive paths to terrorism; the "top-down process" and the "bottom-up process" (CSIS, 2007, in your week three content folder). Unfortunately, due to certain laws, civil rights, and...
-
How do we compute the Average or Accounting Rate of Return on a capital budget proposal and why do you think managers would like to see this? 2) How do we compute the Cash Payback Method when...
-
What is the mode?
-
Beryl Forman has just approached a venture capitalist for financing for her new business venture, the development of a local ski hill. On July 1, 2011, Beryl was loaned $150,000 at an annual interest...
-
Reza Inc. operates a retail operation that purchases and sells snowmobiles, amongst other outdoor products. The company purchases all merchandise inventory on credit and uses a periodic inventory...
-
If your school has a subscription to the FASB Codification, log in and prepare responses to the following. (a) What does it mean to capitalize an item? (b) What is the definition provided for an...
-
The root mean square value of a signal \(x(t), x_{\mathrm{rms}}\), is defined as \[x_{\mathrm{rms}}=\left\{\lim _{T ightarrow \infty} \frac{1}{T} \int_{0}^{T} x^{2}(t) d t ight\}^{1 / 2}\] Using this...
-
What are the various methods available for vibration control?
-
Fill in the Blank. The presence of unbalanced mass in a rotating disc causes ____________ .
Study smarter with the SolutionInn App