The Operations Division of the NDC plc is evaluating several investment projects. The ENPV method has been considered but the Board of Directors thinks otherwise. The following information applies to the budgeted operations of the Operations Division of the NDC plc.

The Operations Division proposes an initial investment of £250,000 and has budgeted sales of 60,000units at £15 per unit. The contribution per unit is estimated at £4 per unit. The budgeted annual fixed cost is £150,000. There was no closing inventory. The minimum desired return on investment is the cost of capital of 50% a year. The variable cost is £6 per unit.

REQUIRED:

1. Calculate divisional profit and comment on the divisional expected return on investment (ROI) and residual income (RI)
2. The Operations Division can sell an additional 10,000 units at £15 per unit. Variable cost per unit would be the same as budgeted, but fixed costs would increase by £30,000. An additional investment of £80,000 would be required. If the manager accepted this opportunity, by how much and in what direction would the residual income change? 

3. NDC plc has diversified its operations to include divisions ABC and CDM. Consider and evaluate the following investments opportunities for Division ABC and CDM. Both divisions have a cost of capital of 28%

Division	ABC	CDM
Capital Investment	£15million	£10million
Divisional Profit	£4.5million	£3.5million
Existing ROI for Royal Docks	29%	29%

REQUIRED

1. Discuss two performance appraisal measures that might be used if NDC plc operates as an investment center. Calculate the return on investment (ROI) and the residual income (RI) for ABC and CDM divisions and advise the management of NDC plc.

2. ABC division has an opportunity to invest in a project that requires a net investment of £7million and generates a yearly profit of £3million.

What is the return on investment (ROI) for this new project? Using ROI, comment on whether this is a good investment for both CDM plc and ABC division.

Answer rating: 100% (QA)

ANSWERS 1 The divisional profit is 60000 The return on investment is 24 and the residual income is 1... View the full answer