Tag (SQ): ROI

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  • 15 Marks

MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

Kumasi Tech Ltd is organised into several investment centres. The annual performance of each investment centre is measured on the basis of ROI. ROI is measured each year as the profit before interest as a percentage of the average investment/average capital employed in the investment centre.
One of the investment centres has achieved a ROI in excess of 35% in each of the past four years. Its managers are considering a new investment project that will have the following cash flows:

Year Cash flow
Beginning of Year 1 (42,000)
1–3 19,000 each year

The initial investment will be in an item of machinery that will have no residual value at the end of Year 3. Assume that depreciation is charged on a straight-line basis.
Required:
(a) Calculate the ROI for the project, each year and on average for the three-year period.

(b) Suggest whether the managers of the investment Centre are likely to invest in the project.

(c) Residual income

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  • 15 Marks

MA – L1 – Q61 – Performance analysis

Calculate ROI for Keta Textiles Ltd for 5 years and assess division performance using ROI and other measures.

Keta Textiles Ltd is planning to open a new investment centre, which will make and sell a single product. The investment in the new division at the beginning of the year will be GH¢2 million, consisting entirely of non-current assets. These are expected to have a five-year life with no residual value, and they will be depreciated each year at the rate of 20% of cost.
Sales in the first year of operation are expected to be GH¢4 million and the budgeted gross profit is 30%. Overhead costs excluding depreciation of non-current assets will be GH¢600,000 in Year 1.
The estimates for the first five years of operation are as follows:
(1) The company will not make any additional investment in non-current assets for the division in the first five years.
(2) The cost of sales per unit in the five years will remain constant, with no increases.
(3) Sales volume will be the same in Year 2 as in Year 1. Sales volume will then increase in Year 3 by 5% but will fall by 10% in Year 4 and a further 10% in Year 5.
(4) The sales price per unit will be increased by 5% in Year 2. There will be no change in sales prices in Year 3, but prices will be increased by 5% in Year 4 and again by 5% in Year 5.
(5) Overhead costs excluding depreciation will remain at GH¢600,000 for the first three years, but will then be GH¢700,000 in each of Years 4 and 5.

Required:
Calculate the return on investment for the division for each of the first five years, assuming that ROI is calculated using the net book value of assets at the beginning of the year.
Using ROI and any other measures of performance, assess the expected performance of the division over the five-year period.

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  • 10 Marks

MA – L2 – Q60 – Performance Analysis

Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

PrimeCorp has several separate divisions, each operating as an investment centre within the group. North Sector makes and sells three products, A, B, and C. All three products are sold under the Apex brand label, but Product A and Product B are also sold through a supermarket group as unbranded products. Budgeted data for the year to 31 December Year 7 is as follows:

Product sales

Product A Product B Product C
units units units
Apex brand 160,000 120,000 50,000
Unbranded 450,000 600,000

Selling prices

Product A Product B Product C
GH¢ per unit GH¢ per unit GH¢ per unit
Apex brand 2.50 3.20 5.00
Unbranded 1.50 2.00

Variable costs

Production Packaging
GH¢ per unit GH¢ per unit
Product A:
Apex brand 1.20 0.30
Unbranded 1.20 0.10
Product B:
Apex brand 1.60 0.40
Unbranded 1.60 0.20
Product C:
Apex brand 2.50 0.50

Budgeted marketing expenditure is GH¢180,000 for the year, and other budgeted expenditure for other fixed costs is GH¢375,000. The average capital employed in North Sector in Year 7 is expected to be GH¢400,000 and the division’s cost of capital is 10%.

Required:
(a) Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

b) Calculate the budgeted residual income for North Sector for the year to 31 December Year 7.

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