Mr. David Smith, the managing director of the brewing division, is concerned that his market share, and hence his ROI, is likely to suffer next year, as his main competitor has recently purchased new brewing technology. While his own brewing equipment is only 10 years old, it is unable to produce the new varieties of beer that customers are demanding, and maintenance and operating costs are increasing.

Mr. Smith is considering a proposal to invest $10 million in new equipment. This will probably increase next year's operating profit for his division by $1 million. He has analysed the future cash flows of this proposal, and the new acquisition will easily satisfy the minimum required rate of return of 10 per cent for all new investments that is set for the whole group. Without this acquisition. Smith expects his divisional ROI to drop to 14 per cent next year

2. Explain why David Smith is reluctant to invest in the new brewing equipment. Provide calculations to support your answer.