Gutho Ltd is currently considering undertaking the acquisition of one of or possibly both of two alternative companies (Browny Ltd and Jenning Ltd ) to further broaden its insurance offerings Both of these companies have recently indicated that they wish to cease operations Details of each companys current performance is provided below Gutho Ltd Browny Ltd Jenning Ltd Sales $2,500,000 $1,300,000 $1,350,000 Variable costs 70 of sales 65 of sales 60 of sales Fixed costs $550,000 $350,000 $340,000 Invested capital $1,250,000 $550,000 $1,000,000 If Gutho Ltd acquires Browny Ltd it would expect to increase its current profit level by 20 and would require an additional capital investment of $260,000 If Gutho Ltd acquires Jenning Ltd it would expect to increase its current profit level by 20 and would require an additional capital investment of $120,000 Gutho Ltd has a minimum required rate of return of 15 Should Gutho Ltd undertake the acquisition of Browny Ltd and or Jenning Ltd Explain your answer and provide supporting Return on investment and Residual income calculations (8 marks)

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Gutho Ltd. is currently considering undertaking the acquisition of one of or possibly both of two alternative companies (Browny Ltd. and Jenning Ltd.) to further

Gutho Ltd. is currently considering undertaking the acquisition of one of or possibly both of two alternative companies (Browny Ltd. and Jenning Ltd.) to further broaden its insurance offerings. Both of these companies have recently indicated that they wish to cease operations. Details of each companys current performance is provided below.

	Gutho Ltd.	Browny Ltd.	Jenning Ltd.
Sales	$2,500,000	$1,300,000	$1,350,000
Variable costs	70% of sales	65% of sales	60% of sales
Fixed costs	$550,000	$350,000	$340,000
Invested capital	$1,250,000	$550,000	$1,000,000

If Gutho Ltd. acquires Browny Ltd. it would expect to increase its current profit level by 20% and would require an additional capital investment of $260,000. If Gutho Ltd. acquires Jenning Ltd. it would expect to increase its current profit level by 20% and would require an additional capital investment of $120,000. Gutho Ltd. has a minimum required rate of return of 15%.

Should Gutho Ltd. undertake the acquisition of Browny Ltd and / or Jenning Ltd? Explain your answer and provide supporting Return on investment and Residual income calculations. (8 marks)