Struanski Limited (Struanski) is a holding company based in Scotland, which owns and controls the operations of

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Struanski Limited (Struanski") is a holding company based in Scotland, which owns and controls the operations of its subsidiaries through the application of the Return on Investment method of assessing divisional performance. Every year, at the time of budget preparation and review, the CFO determines minimum targets for Return on Investment (ROI) for each of the subsidiaries. For the year ahead, the draft budgets of the three main operating companies indude the following relevant data: Budgeted Net Profit 2000 Net Book Value 4000 Replacement Costs of Assets 2000 Pretty Properties Enigma Engineering Simple Software 405 300 2,650 1,100 900 3,150 1,450 600 425 However, subsequent to the preparation of these draft budgets, cach of the companies has developed some new proposals, which they believe to be in the interests of the group as a whole to pursue. These new proposals comprise the following: Pretty Properties (Pretty') The commercial director of Pretty Properties has prepared a proposal to acquire an office block in central Aberdeen at a cost of 2780,000. With annual operating costs estimated at 235.000, she believes that the properties will generate annual gross revenues of 200,900. Enigma Engineering ("Enigma") The managing shrector of Enigma is particularly keen to enhance profitability by pending 35000 to acquire a manufacturing licence for a new product aimed at the expanding oil industry 1 The sales director has estimated that annual sales should reach (550,000 with a contribution ratio of 4 In addition, there will be extra specific fixed costs of [87,000 related to the introduction of the new product. However, there are machinery constraints within Kingma's existing premises, which will regard to be addressed before the proposal can proceed. One possible solution is to Relea machinery capacity by the disposal of one of the current product lines, which catrem constitutes 1020 annual profits. If the production of this current product is communicated there will be savings 21. in annual fixed The best at the product line can be di fora price that will recover the net by the clients purchase the church an expected four-year useful lifetime) and recover the cost of the product stock of £22,500. Simple Software (Simple") The sales director has been approached by a customer that has offered to acquire one o Simple's main software product lines for C280,000. It is expected that this product line will contribute £35,000 out of the budgeted net profit for the year. The following additional information is relevant: 1. The Stranski group uses a cost of capital of 12% as the base in assessing acceptable levels of divisional ROI, being the rate of interest it is receiving on its substantial short-term cash balances (which would be used to fund any of the investment proposals under consideration) 2. The divisional ROI is computed by using net profit for the year related to net assets at the beginning of the year (as given above). It is to be assumed that the proposals under consideration can be implemented by the start of next year, 3. All fixed assets are depreciated on a straight-line basist 4. All proceeds from sale or disposal of current assets go direct to Stranski, 15. All gains on the sale of fixed assets also go direct to Stranski 6. Ignore taxation . Required: Compute the ROI for each of the subsidiaries for next year based on the original deatt budgets and then inclusive of the impact of the new proposals. (12 marks) Evaluate each of the subsidianes proposals and advise whether or not you would ccommend them. Critique the proposals both on the subsidiary's viewpoint and from Struanski's viewpoint