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stay in Protected View Enable Editing attempt both questions. QUESTION 1: Divisional Performance Measurement and Project Appraisal Question 1 (a) Divisional Performance Measurement Zeta is a decentralised manufacturing entity, operating within the electronics industry. Zeta prides itself on giving its customers a well- made product, which reflects the latest trends and technologies in the marketplace. Zeta has two divisions, Alpha and Beta. Return on Investment (ROI) is the primary measure of each division's performance. Each divisional manager has their annual bonus linked to their division's ROI. However, the head office is considering the use of Residual Income (RI) as the basis for measuring bonuses in the future. Division Alpha has been consistently profitable, with gross profit margins remaining at a consistent level for the last three years. The divisional pre- tax operating profit has been steadily growing in the previous three years. However, the division has not undertaken any capital expenditure on new investments in recent years. The manager of Alpha is now considering investing in a new machine to use in production to replace its old machinery. Alpha financials Currently, the net assets of the division are 20m and the division's profit before tax is 3.8m. Included within Alpha's profit is an apportionment of head office costs of 0.6m. The division's cost of capital is 5%. Proposed investment The replacement machine will have a net cost of 3m and an expected useful life of ten years. This replacement machine is expected to increase the controllable profits of Alpha by 12%. Zeta has correctly evaluated the investment using the Net Present Value (NPV) technique. The NPV of the proposed investment is expected to be a positive 1.1m. YOU ARE REQUIRED TO: I. II. Calculate the ROI for Alpha before considering the proposed investment and after the proposed investment. (4 marks) Calculate the RI for Alpha before considering the proposed investment after the proposed investment (4 marks) Based on your calculations discuss the situation and discuss whether the head office should introduce RI for the calculation of divisional manager bonuses. (250 words) (10 marks) In recent years, performance measurement has moved towards a more comprehensive view of performance covering financial but also non- financial performance measures. IV. Explain why non-financial performance indicators are useful in measuring performance. Your answer should suggest examples of non-financial performance indicators Zeta may use. (125 words) (7 marks) (Total 375 words) (Total 25 marks) Zeta has correctly evaluated the investment using the Net Present Value (NPV) technique. The NPV of the proposed investment is expected to be a positive 1.1m. YOU ARE REQUIRED TO: I. Calculate the ROI for Alpha before considering the proposed investment and after the proposed investment. (4 marks) Calculate the RI for Alpha before considering the proposed investment after the proposed investment (4 marks) Based on your calculations discuss the situation and discuss whether the head office should introduce RI for the calculation of divisional manager bonuses. (250 words) (10 marks) = = In recent years, performance measurement has moved towards a more comprehensive view of performance covering financial but also non- financial performance measures. IV. Explain why non-financial performance indicators are useful in measuring performance. Your answer should suggest examples of non-financial performance indicators Zeta may use. (125 words) (7 marks) (Total 375 words) (Total 25 marks)
