*Pregunta 1*

The current operating profits of Commercial Division of Apollo Ltd are 80 million and its invested capital is 750 million. The company is contemplating launching a new product LIMA in the commercial market. If the new LIMA product is implemented, then on an annualised basis, Apollo Lid.'s profits are expected to increase by 12

million and the investment in the new product will require additional capital of &130 million. The company has an overall weighted average cost of capital (WACC) of 9% which is used when determining the viability of new investments.

The departmental manager of the Commercial Division, Kieron Franks is currently remunerated including an annual performance bonus based on maintaining or Improving Retum on Investment (ROl) of the department.

Note: answers to be rounded to two decimal places.

Required:

a) Calculate the Return on Investment (ROl) and Residual Income (RI) for the Commercial Division of Apollo Ltd for the coming year, assuming that the company does not make the new investment.

(4 marks)

b) Calculate the Return on Investment (ROI) and Residual Income (RI) for new product LIMA and for the commercial department as a whole during the coming year, assuming that the company does make the new investment.

(6 marks)

c) (1) Using the information from the question and from your calculations in (a) and

(b) above, briefly discuss the likelihood of Kieron being willing to invest in the new project, and

(4 marks)

(il) suggest two ways in which the bonus scheme might be adjusted to ensure that Kieron's decision in the best interests of the business.

(6 marks)

Total 20 marks