Your manager asked you to estimate an expected growth rate in operating income for the next 5 years for Gleeba Inc, a retail company. During the recently completed financial year, Gleeba reported an after-tax operating income of $150 million on a book value of capital of $1 billion. The firms capital expenditures for that year were $200 million and the depreciation amounted to $75 million. Assume the change in non-cash working capital is zero. You expect Gleeba to maintain this reinvestment rate for the next 5 years. You also anticipate that the company will earn a return on capital of 20% on its new investments and that its return on capital on its existing projects will improve gradually to 20% over the next 5 years.

a) Estimate the expected annual growth rate in operating income for the next 5 years for Gleeba Inc.

b) How much of this annual growth rate comes from the improved efficiency of current projects?