MCN is a manufacturing company that uses Return on Investment (ROI) to assess the performance of its divisional managers. Its current target of ROI is 12% which is equivalent to its cost of capital. One of MCN's divisions is division C, which achieved an ROI of 8% last year.

The purchase of a new machine has been proposed by a member of staff working in division C. It is estimated that the new machine would generate a profit of 60,000 per annum for an investment of 600,000.

Required:

I. Using ROI as the current method of performance assessment, advise whether the manager of Division C is likely to accept or reject the purchase of the new machine.

II. Will this decision be a benefit to or detrimental to the company?

III. Would the manager’s decision remain the same if the performance was assessed on Residue Income (RI).

Answer rating: 100% (QA)

I Using ROI as the current method of performance assessment the manager ... View the full answer