The high rate of return shown by Cookware clearly results, in part, from the nearly fully depreciated nature of much of its equipment, and the proposed investment is really needed simply to be able to continue the business. Assume that as of the first day of 2002 Cookware replaces its melting tanks and the forming equipment at a cost of $60 million, which will be depreciated over ten years (no salvage). Also assume that the depreciation on the replaced equipment was $3 million in 2001, which brought the net book value of the replaced equipment to zero at year-?end 2001. Assume further that the increase in capacity from the new investment of about 20 percent is fully realized in profits 2002. a. Compute estimated ROCE for Cookware for 2002 using results for 2001 and considering the foregoing assumptions about the new investment. b. Is it advisable to continue the Cookware division?

2. Can ROCEs (and GPAs) be inflated? The high rate of return shown by Cookware clearly results, in part, from the nearly fully depreciated nature of much of its equipment, and the proposed investment is really needed simply to be able to continue the business. Assume that as of the first day of 2002 Cookware replaces its melting tanks and the forming equipment at a cost of $60 million, which will be depreciated over ten years (no salvage). Also assume that the depreciation on the replaced equipment was $3 million in 2001, which brought the net book value of the replaced equipment to zero at year-end 2001. Assume further that the increase in capacity from the new investment of about 20 percent is fully realized in profits 2002. a. Compute estimated ROCE for Cookware for 2002 using results for 2001 and considering the foregoing assumptions about the new investment. b. Is it advisable to continue the Cookware division? Exhibit 2 BAY INDUSTRIES Cookware Division ($000,000) 1999 Income Statement 2000 2001 Plan Actual Plan $110.0 $110.2 $116.0 Actual Plan Sales $120.4 $126.0 Actual $140.6 Manufacturing cost Material cost 20.0 22.6 28.8 Conversion cost: Labor 28.2 31.8 39.4 Overhead 37.2 91.6 37.8 Total cost 84.2 106.0 Margin 26.0 28.8 34.6 Other costs New-product development Marketing 1.0 6.2 1.2 Packing and distribution 7.8 6.6 12 72 8.2 Administration 1.0 1.4 1.6 Corp. for divisions 0.8 1.0 16.8 1.6 Total other 18.4 21.4 Net division profit $8.0 $9.2 $9.8 $10.4 $11.0 $13.2 Balance Sheet Accounts receivable $13.2 $15.0 $17.0 Inventory 1.6 1.8 24 Plant and equipment cost 39.4 43.6 48.0 Accumulated depreciation 28.6 32.4 36.6 Net plant and equipment 10.8 11.2 11.4 Total assets 30.8 Current liabilities Capital employed 2.2 $22.8 $23.4 24 $25.8 $25.6 Return on capital employed $27.4 3.0 39% 41% $27.8 35% 38% 40% 47%