QUESTION 4

Snackpacks plc is divided into three divisions. Each division manufactures a range of products which is sold under the Snackpacks brand. The table below shows information from the budget for the coming year. The companys weighted average cost of capital is 10%.

Division	Net assets	Operating profit	Sales revenue
	000	000	000
Drinks	400	150	670
Crisps	550	220	1,150
Popcorn	360	160	980

The directors of Snackpacks are considering a number of proposals as outlined below:

• Invest a further 120,000 in net assets in the Drinks division. This should result in extra sales to the value of 210 and an additional 50,000 operating profit over the budgeted year.

• Close down one of Crisps product lines and replace it with a new one producing healthier snacks. The closure will involve the disposal of non-current assets with a book value of 65,000 and the purchase of new machinery costing 125,000. It is estimated that this will result in a net increase in operating profit of 85,000.

• The reorganisation of the Popcorn factory to increase efficiency. This will cost 80,000 and will be treated as a one-off expense. No plant will be sold or purchased but the efficiency should result in a net increase in operating profit in the year of 20,000.

a) For each division, calculate the return on investment and residual value before and after the directors proposals.

(6 marks)