Question 12 Divisional Performance Measures Company QR Ltd has one head office, and two divisions, Division...

Transcribed Image Text:

Question 12 Divisional Performance Measures Company QR Ltd has one head office, and two divisions, Division Q & Division R. The two divisions operate in nearly identical markets and both serve external customers only. The June profit for 2021 for the two divisions is as follows: Division Q June 2021 £ '000 Revenues Expenses Divisional Assets 11,333 4,345 Division R June 2021 £ '000 16,322 14,332 473,450 1,012,030 The company's cost of capital is 10%. The company has also set a target ROI of 15%. QR Head Office calculates the divisional performance measures based on annualised net profit, after all costs have been taken into account. A) Calculate the ROI and RI for both divisions [4 Marks] B) Q have invested heavily in staff training and a new website during 2021. They have estimated that the total cost expensed was £500,000, and that they will benefit from this over the next five years. R are much more established and do have any similar costs. Calculate the EVA for Q. [4 Marks] C) The company have identified a new project that will require £100m of investment. Due to spending on advertising and training in the first year however the project will only just breakeven in 2022, then generate profits of £20m per annum for the next four years. The leadership of both divisions are unhappy with the proposal. Briefly explain why the two divisions might not want to proceed and discuss the implications if the group were to use EVA to measure performance instead. [7 Marks] [Total 15 Marks] Question 12 Divisional Performance Measures Company QR Ltd has one head office, and two divisions, Division Q & Division R. The two divisions operate in nearly identical markets and both serve external customers only. The June profit for 2021 for the two divisions is as follows: Division Q June 2021 £ '000 Revenues Expenses Divisional Assets 11,333 4,345 Division R June 2021 £ '000 16,322 14,332 473,450 1,012,030 The company's cost of capital is 10%. The company has also set a target ROI of 15%. QR Head Office calculates the divisional performance measures based on annualised net profit, after all costs have been taken into account. A) Calculate the ROI and RI for both divisions [4 Marks] B) Q have invested heavily in staff training and a new website during 2021. They have estimated that the total cost expensed was £500,000, and that they will benefit from this over the next five years. R are much more established and do have any similar costs. Calculate the EVA for Q. [4 Marks] C) The company have identified a new project that will require £100m of investment. Due to spending on advertising and training in the first year however the project will only just breakeven in 2022, then generate profits of £20m per annum for the next four years. The leadership of both divisions are unhappy with the proposal. Briefly explain why the two divisions might not want to proceed and discuss the implications if the group were to use EVA to measure performance instead. [7 Marks] [Total 15 Marks]

Answer rating: 100% (QA)

The detailed answer for the above question is provided below A ROI for Division Q 1... View the full answer