=+10. Oklahoma Chemicals Inc is contemplating changing the method of measuring divisional performance. At present, rate of return on investment (RO!) is used. Each division's return is calculated by dividing net income by the net investment base at the beginning of the year. Straight line depreciation is included in the net income computation. The alternative is to measure performance by means of residual income (RI).

Dr Larry Nathy, the manager of the Ozark Division, is considering an investment now and asks you to evaluate the following data, particularly in respect of the effect on his division's ROI and RI measures:

Initial investment (to)

Expected net cash flows (t\ - t6 ) per annum Expected scrap value (t6)

Oklahoma Chemicals Inc cost of capital Ozark Division current ROI Economic life of asset f

100000 23000 4000 10%

15%

6 years