Mr. Jain is the General Manager of VWX Canada Limited which is a subsidiary of a large multinational 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 VWX discontinued the production and sales of product XYZ. Specific assets held for disposition and not used in 2020 total have gross value of $55,556.

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 VWX for the year ended December 31, 2020 and a proposed capital expenditure.

Questions for This Scenario

1. Comment on the appropriate return on investment calculation for Mr. Jain and calculate the amount to 1 decimal place.
2. Comment on the appropriate return on investment calculation for VWX Limited and calculate the amount to 1 decimal place.
3. Comment on the appropriate return on investment calculation for the large multinational firm and calculate the amount to 1 decimal place.
4. Would Mr. Jain 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

VWX Canada Limited

Balance Sheet as at December 31, 2020

Item$Current assets$48,000Non-current assets112,000Total assets$160,000 Current liabilities$27,200Long term debt80,000Equity52,800Total liabilities and equity$160,000

Idle Assets $55,556

Required return from operations based on total 10% gross assets

VWX Canada Limited

Income Statement

for the year ended December 31, 2020

Item$Sales$192,000Cost of sales123,200Gross Margin68,800Selling and Administrative48,960Operating income19,840Interest at 6%3,840Net Income before tax16,000Income tax5,300Net income$10,700

Capital expenditure proposed50,000 Operating Income by year2,000Year 1 4,000Year 2 6,000Year 3 18,000Year 4 30,000Year 5 30,000Year 6 30,000Year 7 30,000Year 8 30,000Year 9 30,000Year 10