Power LLC is company based in Muscat, Oman; manufacturing and selling automotive parts. The company runs two different divisions to manufacture the above given products, namely Division Z and Division Y. The management of Power LLC rely only on traditional method to performance measures in appraising the performances of its divisions.

The financial performance of Division Z at Power LLC is given as follows:

The Division Z’s net assets are currently OMR 30 m and it earns a profit of OMR 6.7 m per annum. This division’s cost of capital is 12% per annum.

The management of Power LLC is considering two proposals for Division Z.

Proposal 01 involves investing a further OMR 6 m in fixed assets to earn an annual profit of OMR 0.6 m (after depreciation).

Proposal 02 involves the disposal of assets at their net book value of OMR 4.5 m. This would lead to a reduction in profits of OMR 0.8 m. Proceeds from the disposal of assets would be credited to head office not to Division. A. You are required to.

i. Calculate the current Return on Investment (ROI) and Residual Income (RI) for Division Z of Power LLC.

ii. Calculate how the above current ROI and RI would change due to proposal 01 & proposal 02.

Answer rating: 100% (QA)

Requirement 1 Calculation of current ROI Net Profit Net Assets 1... View the full answer