A divisionalised company produces and sells detergent products and is currently considering a capital investment decision. Upon approval of a capital expenditure, divisional managers are given the independence and authority to make the capital investment decision of their choice, for which they are rewarded on good performance based on the return on investment (ROI) earned during each of the first two years by new capital investments. ROI is assessed using closing written down value of the assets each year. One of the company's divisions is currently appraising three modern detergent processing machines that will help reduce operational costs - these include DP1, DP2, and DP3. The manager of this division has been allowed a total spending of RM1,000,000 by the board of directors of the company for which only one of the three machines should be considered. The following are cash flow assessments prepared by the management accountant of this division: - Year DP1 0123 4 NPV Future cash flow Present value @ 12% (RM) (RM) (1,000,000) 1,000,000) 1,000,000 893,000 1,000,000 797,000 750,000 534,000 550,000 349,800 1,573,800 DP2 Future cash Present flow value @ 12% (RM) (RM) (1,000,000) 950,000 950,000 950,000 950,000 DP3 Additional information relating DP1, DP2, and DP3: - Depreciation is on straight line basis. Future cash Present flow value (RM) (1,000,000) (1,000,000) (1,000,000) SAS 350 100,000 89,300 757.150 800,000 676,400 700,000 604.200 100,000 1,886,100. @ 12% (RM) Each of the detergent processing machines have a life of four years. All machines share similar risk levels. Taxation and residual values are ignored here. 637,600 498,400 63,600 288,900 Required: (a) Evaluate DP1, DP2, and DP3 from a divisional point of view. (b) Is there a conflict of interest between the divisional manager and directors of the company regarding the choice of investment? Explain. Show and comment how residual income may be better in evaluating the divisional performance of managers at the company. (9 marks) (12 marks) the board of (4 marks) (c) Total: 25 Marks] APPENDIX TABLE 1 Discount factors: Present value of $1 to be received after tyears = 1/(1+r). Number of Years 1% 2% 12445 2015 Seman Number of Years 16% 17% 1 BLUN 5 5 6555 6 67899 16 17 18 19 20 180 1 59 3% | Present Value Tables 4% 603 5G 5% 0 0 0 386| 19% 20% Interest Rate per Year 6% 75 8% 9% 10% 11% 12% 13% 14% 15% 5 | | 22% Interest Rate per Year 60 88 | 35 23% 24% 25% 155 | 5 550 Note: For example, the interest rate is 10% per year, the present value of $1 received at year 55.621. A 180 153 138 149 | 124 26% | 53| | 33388888.3 55555 55 29% , 30% 3 55 3 APPENDIX TABLE 3 Annuity table: Present value of $1 per year for each of f years 1/r-1/1+ Number of Years 1% 1234in 5 67890 5.795 5.601 5.417 5.242 5.076 4.917 4.767 6.728 6.472 6.230 6.002 5.786 5.582 5.389 7.652 7.325 7.020 6.733 6.463 6.210 5.971 8.566 8.162 7.786 7.435 7.108 6.802 6.515 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 11 10.37 9.787 9.253 11.26 10.58 9.954 12.13 11.35 10.63 13.00 12.11 13.87 12.85 8.760 8.306 7.887 7.499 9.385 8.863 8.384 7.943 9.986 9.394 8.853 8.358 11.30 10.56 9.899 9.295 8.745 11.94 11.12 10.38 9.712 9.108 12345 61828 14.72 13.58 12.56 11.65 10.84 10.11 9.447 17 15.56 14.29 13.17 12.17 11.27 10.48 9.763 16.40 14.99 13.75 12.66 11.69 10.83 10.06 19 17.23 15.68 14.32 13.13 12.09 11.16 10.34 20 18.05 16.35 14.88 13.59 12.46 11.47 10.59 Number of Years 16% 1 2 3 4 5 67900 8 10 11 2% 3% 4% 5% 6% 990 980 971 962 952 943 935 1.970 1.942 1.913 1.886 1.859 1.833 1.808 2.941 2.884 2.829 2.775 2.723 2.673 2.624 3.902 3.808 3.717 3.630 3.546 3.465 3.387 4.853 4.713 4.580 4.452 4.329 4.212 4.100 12445 Interest Rate per Year 10% 11% 12% 13% 7% 8% 9% 14% 15% 926 917 909 901 893 885 877 870 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 2.577 2.531 2.487 2444 2.402 2361 2.322 2283 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 13 61998 4.623 4.486 4.355 4231 4.111 3.998 3.889 3.784 5.206 5.033 4.868 4712 4.564 4.423 4.288 4.160 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 8.559 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.029 4.836 4.656 4.486 4.327 4.177 4.035 5.197 4.988 4.793 4611 4.439 4.278 4.127 5.342 5.118 4.910 4715 4.533 4.362 4.203 4.053 3.912 3.780 3.902 3.776 3.656 3543 3.437 3.335 3.239 3.147 3.985 3.851 3.725 3.606 3.493 3.387 3.286 3.190 3.656 3.538 3.427 3.322 3223 5.468 5.229 5.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 3.695 3.573 3.459 3.351 3.249 15 5.575 5.324 5.092 4.876 4.675 4.489 4.315 4.153 4.001 3.859 3.726 3.601 3.483 3.373 3.268 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 9.604 8.950 8.365 7.839 7.366 6.938 6.550 6.198 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 17 5.749 5.818 Interest Rate per Year 25% 26% 27% 28% 29% 30% 22% 23% 24% 806 800 794 787 781 775 769 1457 1.440 1.424 1.407 1.392 1.376 1.361 1.981 1.952 1.923 1.896 1.868 1.842 1.816 2320 2.280 2241 2.203 2.166 2.635 2.583 2532 2483 2.436 17% 18% 19% 20% 21% 862 855 847 840 1.585 1.566 1.547 833 826 820 813 1.605 1.528 1.509 1.492 1.474 2.246 2210 2.174 2140 2106 2.074 2.042 2011 2.798 2743 2.690 2.639 2.589 2.540 2.494 2448 2404 2.362 3.274 3199 3.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 3.685 3.589 3.498 3410 3.326 3.245 3.167 3.092 3.020 2.951 2.885 2.821 2.759 2.700 2.643 4,039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161 3.083 3.009 2.937 2.868 2.802 4.344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329 3.241 3.156 3.076 2.999 2.925 4.607 4.451 4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463 3.366 3.273 3.184 3.100 3.019 4.833 4659 4.494 4.339 4.192 4.054 3,923 3.799 3.682 3.571 3.465 3.364 3.269 3.178 3.092 5.668 5.405 5.475 5.534 5.877 5.584 20 5.929 5.628 Note: For example, if the interest rate is 10% per year, the investment of $1 received in each of the next 5 years is $3.791. 5.162 4938 4.730 4.536 4.357 4.189 4.033 3.887 3.751 3.623 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910 3.771 3.640 5.273 5.033 4.812 4.608 4.419 4243 4.080 3.928 3.786 3.654 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942 3.799 3.664 5.353 5.101 4.870 4657 4.460 4.279 4.110 3.954 3.808 3.673 3.503 3.390 3.283 3.518 3.403 3.295 3.529 3.413 3.304 3.539 3.421 3.311 3546 3.427 3.316