QUESTION $3($continued$)$

Expansion Plans

The company has recently been looking to expand its operations into other farming operations

and identified Sheep's Wool $($Pty$)$ Ltd $($Sheep$\text{'}$s Wool$)$ as a potential company to acquire.

Sheep's Wool is a sheep farm, producing wool and meat to well$-$known companies all over the

country. The business operates according to ethical business practices and management places

big emphasis on integrity. Sheep's Wool holds a philosophy of responsible leadership to support

services and entities and requires its employees at all levels throughout the entire value chain

to maintain the organisation's vision.

Sheep's Wool

Sheep's Wool $($Pty$)$ Ltd is currently growing its profits at $90\%$ of the inflation rate, due to a new

electrical wool cutting machine that is used by the company. Sheep's Wool has been using

alternative energy sources for the past three years. The new machine that was released in $2022$

continues to be highly regarded in the market. This has resulted in an increase in customer

demand when compared to other sheep farms. Sheep's Wool has delivered strong financial

performance because of the effective control measures adopted three years ago. The control

measures include the study of competitors' wool brands by the research team which then shares

its findings with the marketing team to ensure Sheep's Wool products are at the top of the range

throughout all seasons. The research has led to increased sales volumes, which have

strengthened the cash flows of the company, enabling the entity to settle its short$-$term

obligations at a faster rate leading to a reduction in its debts. The weighted average cost of

capital is $13,20\%.$

The non$-$current asset portfolio is currently worth $R3,4$ million and current profits are expected

to increase as indicated above. The increase in profits is expected to grow constantly.

An extract from the annual financial statements for the period ending $31$ March $2024,$ for Sheep's

Wool:Return on Investment and Investment Decisions The division manager of HFD Inc., was debating the merits of a new product$$a toy drone with a flying radius of $25$ feet. The budgeted income of the division was $$775,000$ with operating assets of $$4,225,000.$ The proposed investment would add income of $$640,000$ and would require an additional investment in equipment of $$4,000,000.$ The minimum required return on investment for the company is $12\%.$ Required: $1.$ Compute the ROI of the following $($round to the nearest whole percent$)$: Line Item Description Answer a$.$ The division if the drone project is not undertaken. fill in the blank $1\%$ b$.$ The drone project alone. fill in the blank $2\%$ c$.$ The division if the drone project is undertaken. fill in the blank $3\%2.$ Compute the residual income of the following: Line Item Description Amount a$.$ The division if the drone project is not undertaken. $fill in the blank $4$ b$.$ The drone project alone. $fill in the blank $5$ c$.$ The division if the drone project is undertaken. $fill in the blank $6$