SUPERIOR Company Limited is a large conglomerate company in United Kingdom and is considering the following projects for inclusion in its capital budget for year 2021.The projects have equal risks and the capital outlay required is as follows:

Project Investment required Return

'000 '000

1 24,000 5,520

2 9,600 3,072

3 7.000 980

4 4,800 864

5 3,200 640

6 1,400 392

As the Divisional Manager, you are to decide which of the projects to accept. The company has a cost of capital of 15% with 60million available to the division for investment purposes.

Required:

Compute the total investment, total return on capital invested and residual income on each of the following assumptions, indicating the preferred project:

1. The Company has a rule that all projects promising at least 20% or more should be accepted.

2. The divisional manager is evaluated on his ability to maximise his return on capital investment.

 

3. The divisional manager is expected to maximise residual income as computed by using the 15% cost of capital.