Ms. Jessica Alba is chief executive of Universal Ltd, a divisionalised company which is diversified across...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Ms. Jessica Alba is chief executive of Universal Ltd, a divisionalised company which is diversified across several lines of business. The Postage Division provides courier services for consumers and small businesses, using small vans owned and operated by the division. The manager of this division has significant autonomy in investment decision making (for example, in relation to purchasing new vehicles) and is paid an annual bonus linked to the division's Return on Investment (ROI). Each year's ROI is measured as accounting profits (after deducting depreciation calculated on a straight-line basis) divided by the net book value of fixed assets at the beginning of the year. The division has a cost of capital of 6% per annum but has consistently achieved an ROI of 11% per annum in recent years. Jessica Alba is concerned that the manager of the division may be adopting a relatively short- term perspective in investment decision making and that this may be detrimental to the maximisation of shareholder value. The following data is provided for a proposed new investment in small vans which is now being considered by the manager of the division: $150,000 $45,000 $58,000 $70,180 Cost of purchasing new vans (payable immediately) Cash inflow in Year 1 Cash inflow in Year 2 Cash inflow in Year 3 Residual value of vans after three years Nil Required: (a) Calculate the Return on Investment (ROI) from Year 1 to Year 3 for the proposed new investment in small vans. (12 marks) (b) Jessica Alba is considering a more radical solution to the problem of exercising control over the Postage Division. Under the new arrangement, Jessica will reserve to herself the right to accept or reject investment proposals. The manager of the division would be assessed based on net profit rather than ROI. Critically evaluate the proposed control arrangement. (13 marks) [25 marks] Ms. Jessica Alba is chief executive of Universal Ltd, a divisionalised company which is diversified across several lines of business. The Postage Division provides courier services for consumers and small businesses, using small vans owned and operated by the division. The manager of this division has significant autonomy in investment decision making (for example, in relation to purchasing new vehicles) and is paid an annual bonus linked to the division's Return on Investment (ROI). Each year's ROI is measured as accounting profits (after deducting depreciation calculated on a straight-line basis) divided by the net book value of fixed assets at the beginning of the year. The division has a cost of capital of 6% per annum but has consistently achieved an ROI of 11% per annum in recent years. Jessica Alba is concerned that the manager of the division may be adopting a relatively short- term perspective in investment decision making and that this may be detrimental to the maximisation of shareholder value. The following data is provided for a proposed new investment in small vans which is now being considered by the manager of the division: $150,000 $45,000 $58,000 $70,180 Cost of purchasing new vans (payable immediately) Cash inflow in Year 1 Cash inflow in Year 2 Cash inflow in Year 3 Residual value of vans after three years Nil Required: (a) Calculate the Return on Investment (ROI) from Year 1 to Year 3 for the proposed new investment in small vans. (12 marks) (b) Jessica Alba is considering a more radical solution to the problem of exercising control over the Postage Division. Under the new arrangement, Jessica will reserve to herself the right to accept or reject investment proposals. The manager of the division would be assessed based on net profit rather than ROI. Critically evaluate the proposed control arrangement. (13 marks) [25 marks]
Expert Answer:
Answer rating: 100% (QA)
a Calculation of Return on Investment ROI from Year 1 to Year 3 for the proposed new investment in small vans Working Notes b Facts Jessica Alba is considering a more radical solution to the problem o... View the full answer
Related Book For
Financial Accounting and Reporting
ISBN: 978-1292080505
17th edition
Authors: Barry Elliott, Jamie Elliott
Posted Date:
Students also viewed these accounting questions
-
Warren is chief executive of a major corporation and is very concerned about his premature balding. He contacts a hair transplant specialist and wants to have surgery performed this year. Write a...
-
Harvey Storm is chief executive of West Wing Savings and Loans. Harvey authorises a loan to Middleman Properties secured on the land it is about to purchase. Middleman Properties has little money of...
-
Chicken Spot sells takeaway chicken and related products. The manager is considering acquiring an advanced new oven which will substantially reduce the time required to cook chicken and would also...
-
Add to Graph a method subgraph() that takes a SET as its argument and returns the induced subgraph (the graph comprising the specified vertices together with all edges from the original graph that...
-
List the four components of a schedule of cost of goods manufactured and provide specific examples of each for Apple.
-
A road contractor has been using kilometers of road constructed as a cost driver. Based on last years costs, he estimates that he can build a mile of road for \($3\) million. The county has recently...
-
Goladen Vineyards is a successful small winery. The owner, Gino Colucchio, is considering an additional line of business: selling wind-generated electricity to the local utility. Tax law requires...
-
A square (10 mm x 10 mm) silicon chip is insulated on one side and cooled on the opposite side by atmospheric air in parallel flow at U = 20 m/s and T = 24C. When in use, electrical power...
-
A discrete variable is a variable that can assume: O countable numbers only O categorical values only O any value over one or more intervals O non-numerical values
-
Tikkity Tock Clock Company sells three types of clocks. They purchase these clocks from manufacturers and sell them to retail stores. Tikkity Tock uses a perpetual inventory system, weighted average...
-
Profit Center Responsibility Reporting Glades Sporting Goods Co. operates two divisions-the Winter Sports Division and the Summer Sports Division. The following income and expense accounts were...
-
How does the Internet facilitate piracy? How might we explain the high levels of involvement in such practices by young people? Whose interests does the criminalization of copying serve? Is there a...
-
Baum argues in "DEI Policies" that "to engage in meaningful professional growth, a foundation of personal growth must be present" (16). How might you grow personally in your own inclusion efforts?...
-
Sometimes, non-unionized employees must pay the union fees and follow union rules. How does the National Labor Relations Board come into the picture? Is it just for unions? Or all employees?
-
Evaluate each of the following transactions in terms of their effect on assets, liabilities, and equity. 1. Receive payment of $12,000 owed by a customer 2. Buy $15,000 worth of manufacturing...
-
8. Using the prosecution provided, explain the process that you or the agency should follow if a breach of ethics was identified. List two ways this may be recorded in the agency. (120-160 words) -...
-
You are the accountant for Hannah Floors Ltd., and you are preparing adjustments prior to the presentation of year-end financial statements of December 31. Patrice Monty, the bookkeeper, has a habit...
-
Borrowing costs should be recognised as an expense and charged to the profit and loss account of the period in which they are incurred : A. If the borrowing costs relate to qualifying asset B. If the...
-
The financial statements of Saturn plc have been prepared as follows: Further information: (a) Extract from statement of income 000 Operating profit.........................1,008 Dividend...
-
Applying the principles of control in IFRS 10 Consolidated Financial Statements , as described in Section 22.3.2 of this chapter, you are required to consider whether certain investments of Austin...
-
Ross Neale is the divisional accountant for the Research and Development division of Critical Pharmaceuticals PLC. He is discussing the third-quarter results with Tina Snedden who is the manager of...
-
Why is it necessary for financial reporting to be subject to (a) mandatory control and (b) statutory control?
-
How is it possible to make shareholders aware of the significance of the exercise of judgement by directors which can turn profits of 6m into losses of 2m?
-
The effective working of the financial aspects of a market economy rests on the validity of the underlying premises of integrity in the conduct of business and reliability in the provision of...
Study smarter with the SolutionInn App