Dubois Garage Doors (DGD) Ltd., has two divisions€”Doors and Electronic Components, which operate in a decentralized manner. The financial information of each division is shown as follows:

The manager of the Electronic Components has an opportunity to invest in a new machine costing $550,000 with a useful life of 5 years. The new machine will have no residual value at the end of the 5th year. The new machine will be able to reduce the direct materials and direct labour by 10% and variable overhead by 5%. The existing machine was purchased 5 years ago for $450,000, and can last for another 5 years with no residual value in 5 years€™ time. If the new machine is purchased, the existing machine can be sold for $50,000. The new machine will be financed through debt and equity with the same current capital structure, and the same cost of debt and equity in the Electronic Components division.

Required:

A. Calculate each division€™s ROI, RI, and EVA.

B. Calculate the net present value for the new investment project for the Electronic Components division, using the WACC as the discount rate.

C. Calculate the ROI, RI, and EVA for the new investment project, using the WACC for the investment.

D. Based on the calculations from (B) and (D), should DGD proceed with the investment?

E. If you were the manager of the Electronic Components division and your performance evaluation is based ROI, would you proceed with the investment?

F. Recommend a performance evaluation measure that would increase the managers€™ incentives to make decisions that would be in the best interests of DGD.

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Electric Doors Components Sales $1,200,000 $2,550,000 Variable Costs: Direct Materials 180,000 357,000 Direct Labour 420,000 816,000 Variable Overhead 120,000 204,000 Total Variable Costs: 720,000 1,377,000 Contribution Mar 480,000 1,173,000 Fixed Overhead (excluding interest expenses) 180,000 451,000 Operating Income (EBIT) 300,000 816,000 $960,000 $3,000,000 Total Assets 192,000 Current Liabilities 900,000 Debt: Equity 3:2 1:1 Cost of Debt 10% 10% Cost of Equity 14% 12% Tax Rate 30% 40%