The managers of Machining Division of Steno Company produced the following budgeted profit statement for the next financial year:

Machining Division budgeted profit statement for the year ended 31 December 2003

$000

Sales 1000

Variable costs 500

Contribution margin 500

Fixed costs 300

Profit 200

Capital invested in the division 1000

ROI 20%

Divisional managers at Steno Company are paid a bonus based on meeting their budgeted ROI target. Therefore at Machining Division the division must achieve an actual ROI of 20% to obtain a bonus at the end of the year.

The managers of Machining Division are now considering a new capital investment opportunity which was not included in the original budget for 2003. Details of the capital investment project are as follows:

$000

Capital investment cost 150

Annual profit 25

The asset will have a 4-year life and the company cost of capital is 15%.

Required:

Consider whether, as the manager of Machining Division, you would accept or reject the investment opportunity; and as the Chief Executive of Steno Company, whether you would accept or reject the investment opportunity.