DC is the chemicals division of a large industrial corporation. GE, the divisional general manager, is about to purchase new plant in order to manufacture a new product. He can buy either the Alanine or the Zirconium plant, each of which have the same capacity and expected four-year life, but which differ in their capital costs and expected net cash flows, as shown below: Alanine $ 6,400,000 Zirconium $ 5,200,000 Initial capital investment Net Cash Flow (before tax) 2020 2021 2022 2023 2,400,000 2,400,000 2,400,000 2,400,000 2,600,000 2,200,000 1,500,000 1,000,000 315,634 189,615 Net Present Value @ 16% pa In the above calculations it has been assumed that the plant will be installed and paid for by the end of December 2019, and that the net cash flows accrue at the end of each calendar year. Neither plant is expected to have a residual value after decommissioning costs. Like all other divisional managers in the corporation, GE is expected to generate a profit before tax return on his divisional investment in excess of 16 per cent p.a., which he is currently just managing to achieve. Anything less than a 16 per cent return would make him ineligible for a performance bonus and may reduce his pension when he retires in early 2022. In calculating divisional returns, divisional assets are valued at net book values at the beginning of the year. Depreciation is charged on a straight-line basis. Besides depreciation, no other adjustments are required to calculate the profit before tax from net cash flows. Requirements: a. Explain, with appropriate calculations, why neither return on investment nor residual income would motivate GE to invest in the process showing the higher net present value. (13 marks) b. Discuss what steps can be taken to avoid dysfunctional behaviour which is motivated by accounting-based performance targets. (4 marks)