Mr. Hassan is the Western Region Manager of PQR Canada Limited which is a subsidiary of a

publicly traded Canadian firm that is traded on a major stock exchange.

The parent company has responsivity for all capital expenditure decisions of the subsidiary, and

can dictate if the subsidiary must discontinue operations in a market segment and sell the

associated assets used in this segment.

During 2019 the parent company told the subsidiary that it must discontinue product XYZ and

late in 2019 PQR discontinued the production and sales of product XYZ. Specific assets held for

disposition and not used in 2020 total have gross value of $41,667.

All entities are evaluated on the return on the assets invested and the required return must be at

least 10% in order to earn annual bonuses which are scaled up as the ROI increases above the

10% required return.

For purposes of ROI, fixed assets are valued at gross value and not net value.

On the next pages you see condensed summary financial statements for PQR for the year

ended December 31, 2020 and a proposed capital expenditure.Version M

Page 2 of 3

Questions for This Scenario

1. Comment on the appropriate return on investment calculation for Mr. Hassan and

calculate the amount to 1 decimal place.

2. Comment on the appropriate return on investment calculation for PQR Limited and

calculate the amount to 1 decimal place.

3. Comment on the appropriate return on investment calculation for the publicly traded

Canadian firm and calculate the amount to 1 decimal place.

4. Would Mr. Hassan be motivated to make the capital investment at the present time?

BRIEFLY justify your answer.

5. Do you think the bonus system suits the shareholders best interests?

BRIEFLY justify your answer.

Financial Statements

PQR Canada Limited

Balance Sheet as at December 31, 2020

Item $

Current assets $36,000

Non-current assets 84,000

Total assets $120,000

Current liabilities $20,400

Long term debt 60,000

Equity 39,600

Total liabilities and equity $120,000

Idle Assets $41,667

Required return from

operations based on total 10%

gross assetsVersion M

Page 3 of 3

PQR Canada Limited

Income Statement

for the year ended December 31, 2020

Item $

Sales $144,000

Cost of sales 92,400

Gross Margin 51,600

Selling and Administrative 36,720

Operating income 14,880

Interest at 6% 2,880

Net Income before tax 12,000

Income tax 4,000

Net income $8,000

Capital expenditure

proposed 37,500

Operating Income by year 1,500 Year 1

3,000 Year 2

4,500 Year 3

13,500 Year 4

22,500 Year 5

22,500 Year 6

22,500 Year 7

22,500 Year 8

22,500 Year 9

22,500 Year 10