QUESTION 3 Big Ben Engineering Ltd is organized into several investment centres. The annual performance of each investment centre is measured on the basis of ROI. ROI is measured each year as the profit before interest as a percentage of the average investment/average capital employed in the investment centre. One of the investment centres has achieved a ROI in excess of 30% in each of the past 3 years. Its managers are considering a new investment project that will have the following cash flows: Year Start of year I 1-3 Cash flow (Ghe) (45,000) 20,000 each year The initial investment will be in an item of machinery that will have no residual value at the end of year 3. Assume that depreciation is charged on a straight-line basis. Required: a. Calculate the ROI for the project each year and on average for the three-year period. 8 marks b. Suggest whether the managers of the investment centre are likely to invest in the project. 4 marks 8 marks Calculate the residual income for the project for each year, assuming that a cost of apital of 12% is applied. 1. Suggest how the decision by the centre's managers about investing in the project might e changed if residual income (RI) rather than ROI were used to measure divisional erformance. 5 marks Total (25 marks)