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.Version H

Page 2 of 3

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 $48,000

Non-current assets 112,000

Total assets $160,000

Current liabilities $27,200

Long term debt 80,000

Equity 52,800

Total liabilities and equity $160,000

Idle Assets $55,556

Required return from

operations based on total 10%

gross assetsVersion H

Page 3 of 3

VWX Canada Limited

Income Statement

for the year ended December 31, 2020

Item $

Sales $192,000

Cost of sales 123,200

Gross Margin 68,800

Selling and Administrative 48,960

Operating income 19,840

Interest at 6% 3,840

Net Income before tax 16,000

Income tax 5,300

Net income $10,700

Capital expenditure

proposed 50,000

Operating Income by year 2,000 Year 1

4,000 Year 2

6,000 Year 3

18,000 Year 4

30,000 Year 5

30,000 Year 6

30,000 Year 7

30,000 Year 8

30,000 Year 9

30,000 Year 10