Question 24 ChemiMix is the chemicals division of a large industrial multinational. Graham Lambert, the divisional manager is about to purchase some new equipment in order to manufacture a new product. He has two options: to buy the Perforex or the Graphite, each of which have the same capacity and expected four year life, but which differ in their capital costs and expected net cash flows, as shown below. mama Net cash flows before tax 2010 2,400,000 2, 600, 000 In the above calculations it has been assumed that the plant will be installed and paid for by the end of December 2009, and that the net cash flows accrue at the end of the calendar year. Neither plant is expected to have a residual value after decommissioning costs. Like all other divisional managers in the company, Graham is expected to generate a before tax return on his divisional investment in excess of 16% per year, which he is just managing to achieve. Anything less than a 16% return would make him ineligible for a performance bonus and may reduce his pension when he retires in early 2011. In calculating returns, divisional assets are valued at net book values at the beginning ofthe year. Depreciation is charged on astraight line basis. Requed: a) Explain, with appropriate calculations, why neither return on investment nor residual income would motivate Graham to invest in the process showing the higher net present value. b) To what extent can the use of alternative accounting techniques assist in reconciling the conflict between using accounting-based performance measures and discounted cash flow investment appraisal techniques? c) Discuss what steps can be taken to avoid dysfunctional behaviour which is motivated by accou nting-based performance targets