The current operating profits of Hormiguita Ltd are 80 million and its invested capital is 750 million. The company is contemplating launching a new product OSO HORMIGUERO in the commercial market. If the new OSO HORMIGUERO product is implemented, then on an annualised basis, Hormiguita Ltd profits are expected to increase by 12 million and the investment in the new product will require additional capital of 130 million. The company has an overall weighted average cost of capital (WACC) of 9% which is used when determining the viability of new investments. The departmental manager of the Commercial Division, Fausto Contreras is currently remunerated including an annual performance bonus based on maintaining or improving Retum on Investment (ROI) of the department. a) Calculate the Return on Investment (ROI) and Residual Income (RI) for the Commercial Division of Hormiguita Ltd for the coming year, assuming that the company does not make the new investment.

b) Calculate the Return on Investment (ROI) and Residual Income (RI) for new product OSO HORMIGUERO and for the commercial department as a whole during the coming year, assuming that the company does make the new investment.

c) (i) Using the information from the question and from your calculations in (a) and (b) above, briefly discuss the likelihood of Fausto being willing to invest in the new project, and (ii) suggest two ways in which the bonus scheme might be adjusted to ensure that Fausto's decision is in the best interests of the business.