The Says division of the Tower Co. currently has its capital employed amounting to $7,300,000 and earns an annual profit after depreciation of $1,971,000. The divisional manager is considering a new investment in the North region that will benefit their shareholders. The new investment will cost $2,200,000 in asset acquisition which will have 5 years of economic life with a $200,000 residual value at the end of its useful life. This investment will generate a constant annual profit before depreciation of $950,000. Depreciation is calculated using the straight line method. The cost of capital is 10%.

Required:

Evaluate the new investment and conclude with a brief comments based on the following:

i.Return on Investment (ROI) of the Says division before and after the new investment and also the ROI of the new investment.(6 marks)

ii.Residual Income (RI) of the Says division before and after the new investment and the RI of the new investment.(4 marks)