Answer Happy

a Explain the meaning of each of the undernoted measures which may be used for divisional performance measurement and investment decision-making. Discuss the advantages and problems associated with the use of each. (i) Return on capital employed. (ii) Residual income. (iii) Discounted future earnings. b Comment on the reasons why the measures listed in (a) above may give conflicting investment decision responses when applied in the name set of data. Use the following figures to illustrate the conflicting responses which may arise: Additional investment 61 £60 000 for a 6 year life with nil residual value. Average net profit per year: £9000 (after depreciation). Cost of capital: 14 per cent. Existing capital employed: £300 000 with ROCE of 20 per cent. (Solutions should ignore taxation implications.)