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P13.35 LO13.2 13.5 Behavioural implications of ROI: computer-integrated manufacturer Jasmine Enterprises made a capital investment of $200 000 in new equipment for its retail division two years ago. The analysis at that time indicated that the equipment would save $70 000 in operating expenses per year over a five-year period. Discounted cash flow methods were used to evaluate the proposal. Before the purchase, the division's Rol was 20 per cent. Tom Walton, the division manager, believed that the equipment had lived up to its expectations. However, the divisional performance report showed that the overall Rol for the first year in which the equipment was used was less than that in the previous year! Walton asked the accounting department to break down the figures related to this investment to find out why it did not contribute to improving the division's ROI. The accounting department was able to identify the equipment's contribution to the division's operations. The report presented to the division manager at the end of the first year is as follows: Reduced operating costs due to new equipment Less Depreciation, 20% of cost Contribution Investment, beginning of year Investment, end of year Average investment for the year $ 70 000 40 000 $ 30 000 200 000 160 000 180 000 30 000 ROI = 180 000 = 16.7% Walton was surprised that the ROI was so low, because the new equipment performed as expected. The staff analyst in the accounting department replied that the ROI used for performance evaluation differed from the methods used to evaluate capital investment proposals. Required: 1. Explain why the new equipment has not resulted in the expected improvement in financial performance. 2. Discuss the behavioural problems that can be associated with using ROI as a divisional performance measure. What might Tom Walton do the next time a new equipment purchase is proposed