Compute plc is a UK-based firm split into four operating divisions, Chip, PC, Printer and Drive. Each division is seen as being an autonomous unit with profit and investment responsibilities. The cost of capital for the company is 12 per cent and this rate reflects the risk which all divisions are subject to. In the ROI calculations for performance measurement purposes, the beginning of year asset base is used for each division. Fixed assets are depreciated on a straightline basis. The following positions are recorded as at 1 November 2010. Divisions Investment in net assets 1 November 2010 Budget for year to 31 October 2011 Controllable profit m m Chip 192 48 PC 270 90 Printer 168 50.4 Drive 120 15.6 After the divisional budgets for 2010/11 were drawn up, each division had additional investment proposals to consider which, if accepted, would alter the above figures because each would be completed by 1 November 2010. The divisional proposals are as follows: Chip An investment of 60 million in new cleanroom facilities for wafer fabrication which would produce sales of 90 million per annum. Expected net profit is 12 million per annum. PC Termination of the assembly of personal computers which is budgeted to yield a profit of 9 million for 2010/2011. These assets had a remaining book value of 45 million. Printer Sale of entire production line of dot matrix printers for book value being 12 million. The budgeted figures above include a profit of 12 million from this line. Additionally, 60 million would be invested in a laser printer production line which would give 18 million profit per annum. Drive Investment in an additional production line to cope with increased demand for small diameter disks; 48 million required, with expected sales of 21.6 million and annual profits of 6.72 million. As the financial consultant to Compute plc you are required to do the following: Required: (a) On the basis that all proposals are implemented on 1 November 2010: Page 7 of 8 (i) calculate the updated ROI for each division for the year to 31 October 2011; (8 marks) (ii) identify those divisional managers who would expect to receive a higher bonus if bonuses are related to ROI; (2 marks) (iii)explain how the decisions of each divisional management may affect the companys overall financial performance for 2010/11. (6 marks) (b) Calculate the budgeted RI for each division on the basis that each investment/ disinvestment goes ahead and briefly comment on the results. (5 marks) (c) Briefly explain two drawbacks of return on investment (ROI) compared to residual income (RI) if these measures are used to assess managerial performance.