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Polyester division of Quintex Ltd has forecast a net profit before tax of N$3 million per annum for the next five years, based on net capital employed of N$10 million. Plant replacement over this period is expected to be equal to the annual depreciation each year. These figures compare well with the group's required rate of return of 20% before tax. Polyester's management is currently considering a substantial expansion of its manufacturing capacity to cope with the forecast demands of a new customer. The customer is prepared to offer a five year contract providing Polyester with annual sales of N$2 million.
REQUIRED
Problem 1: Calculate the impact of accepting the contract on Polyester division's:
[a) Return on investment (ROI) for each of the 5 years
[b) Residual income (RI) for each of the 5 years, using 20% imputed interest rate.
Problem 2: Discuss with reasons, for each method whether or not it would be attractive to Polyester division's management.
Problem 3: Explain three [3) reasons why a performance measurement system based solely on financial measure may not be effective in evaluating the long-term performance of companies.
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