Mr$.$ Smith is the President of ABC 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 $2019$ ABC discontinued the production and sales of product XYZ$.$ Specific assets held for disposition and not used in $2020$ total have gross value of $$27,778.$

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

Would Mr$.$ Smith be motivated to make the capital investment at the present time. BRIEFLY justify your answer.

Financial Statements

ABC Canada Limited

Balance Sheet as at December $31,2020$

Item $

Current assets $$30,000$

Non$-$current assets $70,000$

Total assets $$100,000$

Current liabilities $$17,000$

Long term debt $50,000$

Equity $33,000$

Total liabilities and equity $$100,000$

Idle Assets $$27,778$

Required return from

operations based on total $10\%$

gross assets

$$

ABC Canada Limited

Income Statement

for the year ended December $31,2020$

Item $

Sales $$120,000$

Cost of sales $77,000$

Gross Margin $43,000$

Selling and Administrative $30,000$

Operating income $13,000$

Interest at $6\%3,000$

Net Income before tax $10,000$

Income tax $3,300$

Net income $$6,700$

Capital expenditure proposed $25,000$

Operating Income by year $1,000$ Year $1$

$2,000$ Year $2$

$3,000$ Year $3$

$9,000$ Year $4$

$15,000$ Year $5$

$15,000$ Year $6$

$15,000$ Year $7$

$15,000$ Year $8$

$15,000$ Year $9$

$15,000$ Year $10$