Please answer questions 1-6

Mini Case Study Sligo Enterprises made a capital investment of $200,000 in new equipment for its retail division two years ago. The analysis at the 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 divisions ROI was 20 per cent. Claire O'Gara, the divisions manager, believed that the equipment had lived up to its expectations. However, the divisional performance report showed that the overall ROI for the first year in which the equipment was used was less than that in the previous year! 0' Gara asked the accounting department to break down the figures related to the investment to find out why it did not contribute to improving the divisions ROI. The accounting department was able to identify the equipment's contribution to the divisions 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 $70,000 Less depreciation at 20% of cost 40,000 Contribution 30,000 Investment, beginning of year 200,000 Investment, end of year 160,000 Average investment for the year 180,000 ROI = 30,000/180,000 = 16.7% O'Gara was surprised that the ROI was so low, because the new equipment performed as expected. The staff analysts in the accounting department replied that ROI used for performance evaluation differed from the methods to evaluate capital investment proposals. Required: 1. Explain why the new equipment has not resulted in the expected improvement in financial performance. (3 marks) 2. Discuss the behavioural problems that can be associated with using ROI as a divisional performance measure. (4 marks) 3. What might Claire O'Gara do the next time a new equipment purchase is proposed? 4. How can using ROI as a performance measure for investment centres lead to bad decision making? What steps can be taken to mitigate the effect? (3 marks) 5. Provide 2 examples of decisions the manager of an investment centre might make to improve its ROI, but which may harm the future competitiveness ofthe firm? (3 marks) 6. Why is there typically a rise in ROI over time? How can this be avoided? (4 marks) END