434 ACCOUNTING FOR MANAGERS
Overall, Compax has a higher ROI, a higher RI and a higher cash value added based
on the NPV. This is the preferred investment. However, it is important to realize that the
returns for Compax are in the third and fourth years. Newpax looks more appealing in
the first two years, when both its ROI and RI are higher. This may make Newpax more
attractive from a divisional perspective or if Anston has a short-term focus.
13.5
See Table A2.25.
Before the new investment, Divisions A andC have the highest ROI and Division C has
the highest residual income. The additional investment achieves the same ROI and RI for
each division. After the new investment, Division A has the highest ROI and Division C the
highest RI. Division B has a negative RI before and after the new investment because the
current ROI of 6% is less than the cost of capital of 7%. The additional investment improves
that position, but Division B still erodes shareholder value.
Solutions for Chapter 14
14.1
Cash received in: Jan Feb Mar after never
Sales made in: Jan 100 30 60 8 – 2
Feb 120 36 72 9.6 2.4
Mar 110 33 74.8 2.2
330 30 96 113 84.4 6.6
Cash received in March £113, 000
Debtors at end of March 84. 4 + 6. 6 =£91, 000Table A2.25
Division A Division B Division C
Original investment 1,000,000 1,500,000 2,000,000
Original net profit 75,000 90,000 150,000
Original ROI 7.5% 6.0% 7.5%
Cost of capital 7% 70,000 105,000 140,000Original RI 5,000 −15,000 10,000
Additional investment 500,000 500,000 500,000
Additional profit 40,000 40,000 40,000
Additional ROI 8.0% 8.0% 8.0%
Cost of capital at 7% 35,000 35,000 35,000Additional RI 5,000 5,000 5,000
New investment 1,500,000 2,000,000 2,500,000
New profit 115,000 130,000 190,000
New ROI 7.7% 6.5% 7.6%
New cost of capital 105,000 140,000 175,000New RI 10,000 −10,000 15,000