Njenge Ltd$.$ is a divisionalised company. Decisions about bonuses and promotions for

Divisional Managers are at the discretion of the company$$s Directors, but are

significantly influenced by each division$$s return on investment $($ROI$).$ For the purposes

of ROI calculations, fixed assets are measured at their net book value at the end of the

financial year.

The following forecasts are available for the company$$s three divisions for the year

ended $31$st December $2010$:

Sales Net profit Capital at $31$st December

Division A: K$600,000$ K$125,000$ K$1,100,000$

Division B: K$500,000$ K$80,000$ K$900,000$

Division C: K$200,000$ K$37,000$ K$210,000$

After the above forecasts were prepared, one possible extra project was identified for

each division. These projects would commence on $1$st January $2010,$ and each

Divisional Manager must decide by that date as to whether or not to accept his or her

division$$s possible extra project. Details of these possible extra projects $($which would

continue for several years if accepted$)$ are as follows:

$$ Division A could increase its market share. This would result in extra sales of K$60,000$

in $2010$ and K$200,000$ in each subsequent year. The profit margin on sales would be

$19\%.$ The only additional investment required would be an increase of K$225,000$ in the

division$$s working capital for the duration of the project.

$$ Division B could invest K$200,000$ in new technology which would improve the

productivity of the division$$s manufacturing facilities. This extra investment would be

depreciated on a straight$-$line basis over an $8-$year life, and an additional investment of

K$60,000$ in the division$$s working capital would also be required for the duration of the

project. The productivity improvement would result in increased sales of K$130,000$ in

Page $12$ of $14$

$2010$ and K$140,000$ in each year thereafter. The profit margin on sales would be $30\%,$

before taking account of depreciation.

$$ Division C could invest K$40,000$ in a new delivery vehicle, which would be

depreciated at a rate of $30\%$ per annum on a diminishing balance basis. Annual sales

would increase by K$64,000,$ and the profit margin on sales would be $25\%$ before

depreciation. An additional working capital investment of K$10,000$ would also be

required.

Required:

a$)$ For $2010,$ calculate each of the following:

I. The ROI for each division, and for Njenge Ltd$.$ as a whole, assuming that

the extra projects are not accepted.

II$.$ The expected ROI for each of the three extra projects.

$(10$ Marks$)$

b$)$ Calculate the ROI of each extra project for $2011.(8$ Marks$)$

c$)$ Explain whether each Divisional Manager is likely to accept his or her division$$s

proposed extra project and what decision would be in the best interests of the

company$$s shareholders in each case, insofar as is possible from the information

available. $($Indicate any reservations which you may have about the

comprehensiveness of the information available$).(7$ Marks$)$

$[$Total: $25$ Marks$]$