(a) Explain the meaning of each of the undernoted measures which may be used for divisional performance measurement and investment decision making. Discuss the advantages and problems associate with the use of each:

(i) return on capital employed;

(ii) residual income;

(iii) discounted future earnings.

(b) Comment on the reasons why the measures listed in

(a) above may give conflicting investment decision responses when applied to the same set of data. Use the following figures to illustrate the conflicting responses which may arise:

(i) additional investment of £60,000 for a 6 year life with nil residual value;

(ii) average net profit per year: £9,000 (after depreciation); cost of capital: 14%;

(iii) existing capital employed: £300,000 with ROCE 20%.