eBay Division is one division of Chester Group and operated as an investment center. The divisional manager will be awarded a bonus at year end if the ROI achieves or beyond the target of 20%. Divisional ROI is defined as divisional net profit as a percentage of the net

assets employed at beginning of the year.

At end of 2019, senior management decided to add an item of Corporate costs allocated before arriving at net profit. The corporate cost becomes a fixed charge to each division. Prior to this, the net profit is equivalent to divisional profit as shown below.

The budgeted operating statement for the year of 2019 is shown below:

eBay Division	$000
Sales revenue	1,500
Less: variable costs	(750)
Contribution	750
Less: Divisional fixed costs	(374)
Divisional profit	376
Less: Corporate costs allocated	(90)
Net profit	286
Divisional net assets at beginning of the year 2019	$1,840

The cost of capital is 12% for the group who uses net present value (NPV) for investment appraisal. Ignore taxation.

1. At the beginning of 2019, the manager of eBay Division has now been offered an immediate opportunity to invest in new machinery at a cost $432,000. The machinery is expected to have a useful economic life of 3 years without any scrap value. It is depreciated on a straight-line basis over the life of the asset. The machinery would be expected to increase annual revenue by $400,000 comparing to the above budgeted operating statement.
   1. Calculate the NPV for investment in machinery using 12% cost of capital. Will the group agree to this investment? (3 marks)

Recalculate eBays expected ROI of 2019 based on Divisional profit. State whether the divisional manager will be making a decision that is in the best interests of the group. 6 marks