Polyester division of Quintex Ltd has forecast a net profit before tax of N$3 million per

annum for the next five years, based on net capital employed of N$10 million. Plant

replacement over this period is expected to be equal to the annual depreciation each year.

These figures compare well with the group's required rate of return of 20% before tax.

Polyester's management is currently considering a substantial expansion of its

manufacturing capacity to cope with the forecast demands of a new customer.

• The customer is prepared to offer a five year contract providing Polyester with

annual sales of N$2 million.

• In order to meet this contract, a total additional capital outlay of N$2 million is

envisaged, being N$1.5 million of new fixed assets plus N$0.5 million of working

capital. The plant life is expected to be 5 years with zero scrap value.

• Operating costs for the contract are estimated to be N$1.35 million per annum,

excluding depreciation.

• This is considered to be a low-risk venture as the contract would be firm for 5

years and the manufacturing processes are well understood within Polyester.

• The consequences of income tax on the proposal may be ignored.

REQUIRED

Calculate the impact of accepting the contract on Polyester division's:

[a) Return on investment (ROI) for each of the 5 years

[b) Residual income (RI) for each of the 5 years, using 20% imputed

interest rate.

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4.2. Discuss with reasons, for each method whether or not it would be

attractive to Polyester division's management.

4.3. Explain three [3) reasons why a performance measurement system

based solely on financial measure may not be effective in evaluating the

long-term performance of companies.