Fedrex Ltd delivers postal services in New Zealand. The company recently has purchased a delivery truck to be used in the postal delivery service. The truck belongs to the delivery division of the company. The cost of the new delivery truck is $1,200,000; the expected useful life of the truck is five years. The estimated salvage value at the end of five years is $0. The company decided to depreciate the new truck over a five-year period using straight-line depreciation. The anticipated increase in operating income (before depreciation deductions) attributable to the use of the new equipment is $360,000. Ignore taxes. Assume in all cases below that the proposed investment, on a discounted cash flow basis, is desirable (i.e., as its estimated net present value [NPV] is positive).

1) Calculate the year-by-year ROIs associated with this investment opportunity. For purposes of these calculations, define the investment base (denominator of the ROI ratio) as the average net book value (NBV) of the assets during the year.

2) Calculate the year-by-year ROIs for this investment opportunity under the assumption that the denominator in the ROI calculation is defined as the gross book value of the assets to be acquired.

3) Calculate the year-by-year ROIs for this investment opportunity under the assumption that the denominator in the ROI calculation is defined as the gross book value of the assets to be acquired.

4) Calculate year-by year and total Residual Income (RI) using NBV of asset based on a weighted-average cost of capital (WACC) of 8%. For imputed cost calculation use a simple average of beginning-of-year and end-of-year asset values.

5) Explain behavioural issues associated with the use of ROI in evaluating the performance of the divisional manager. Use ROI calculation that you made in requirement 1.1 and 1.2 to justify your answer.

6) Would the use of the residual income (RI) measure of financial performance eliminate the behavioural issue raised in requirement five?