Paper delivered at LTU and Partners in April 2022 Page 3 of 6 2. Pollux Castor Productions (PCP) Ltd Scenario PCP Ltd, established in 1990, manufactures optical instruments for markets in the UK and the USA. Since 2007, their market in the USA has been in decline, due to an influx of lower precision, cheaper supply from the Far East. Because of this, in 2009, PCP decided to focus on supplying specialist optical products for use in Medical procedures and research, opening a specialised manufacturing division based in Chicago. This division has performed well, even though the costs of supporting management and supply functions from the company HQ in the UK have been higher than was anticipated in their original return calculations, which employed only NPV to establish the viability of investment in the division. The company is now considering the development of a further new division to research and develop new optical medical technology, following recent market research data which indicated that the medical technology market is growing across the developed world. PCP Ltd has not declared a cash dividend since 2017, although a stock dividend was issued in 2020

1. Explain the benefits and drawbacks of using either ARR (Accounting Rate of Return) or PP (Payment Period) instead of NPV (Net Present Value) as a measure of Return on Investment when considering alternative capital projects? (20 marks) 2. Using a structured approach to decision making and the facts in the scenario above, explain and evaluate the long term funding options available to the company to finance their planned new division. (20 marks) 3. With reference to the case study facts and your understanding of dividend policy, explain why the directors may have elected not to pay a cash dividend since 2017 and how this and subsequent dividend policy may affect company valuation and shareholder retention. (10 marks)