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Fareast Group is a conglomerate with presence in various continents. Return on investment (ROI) has been the Group managers' favorite tool used in measuring divisional
Fareast Group is a conglomerate with presence in various continents. Return on investment (ROI) has been the Group managers' favorite tool used in measuring divisional performance. In the past two years, the Group's automobile division showed decreasing ROl results as follows: 2018 ROI = (AED2,000,000/AED20,000,000) x (AED20,000,000/AED10,000,000) = 0.20 2019 ROI = (AED2,400,000/AED25,000,000) x (AED25,000,000/AED15,000,000) = 0.16 Profit/sales x sales/asset The top management of the Group was unamused by the poor performance as they required 25 percent in return for their additional investment in the automobile division. Required: a. The Group's top management has sought your advice as to why the automobile failed to perform up to expectation. Support your argument with calculations. (3 marks) b. In a meeting with the Group's top management, you came to learn that the ROI calculations given for the automobile division comprised income from operations, net sales, and the closing value of invested capital for each year. They also mentioned to you a keyword "Dupont". In your mind, you are considering an alternative to make the ROI values read better. Propose your alternative and discuss. (5 marks)
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