Question 1 Norway (Pty) Ltd is a divisionalised company, where the divisional managers remuneration packages are linked to the return on investment of their divisions. Return on investment is based on the net book value of assets employed in the division at the beginning of the financial year. On average, divisional managers remain in their posts for a three-year period. The manager of the Scandinavian division is considering two mutually exclusive alternative proposals for investing in new machinery. These proposals both involve an initial outlay of R250 000, but will yield different levels of savings over the life of the machinery, which is estimated at five years, after which they will have no residual value. Norway (Pty) Ltd s depreciation, is calculated on a straight-line basis. The savings will give rise to increased cash flows as follows: Year Machine A Cash flows B Cash flows 1 80 000 100 000 2 80 000 90 000 3 80 000 80 000 4 100 000 60 000 5 100 000 40 000 Required: 1. Appraise each project, using a) return on investment, as described above b) net present value, using the companys cost of capital of 6% 15 marks Based on your results from (1), explain which machine the divisional manager is likely to choose and discuss the potential conflict between performance measurement and investment appraisal.