BUSI 354 Assignment on Performance Measurement

BUSI 354
Assignment on Performance Measurement
The D Division of the DEF Corporation has budgeted after-tax profits of $1 million for 2013. It has
budgeted assets as of January 1, 2013, of $10 million, consisting of $4 million in current assets and $6
million in property, plant and equipment (PP&E). PP&E assets are included in the asset base at gross
book value. The net book value of these assets is $3 million and they are depreciated over a 10-year
period on a straight-line basis.
Senior management of DEF Corporation has approached the manager of the D Division with a
proposal to upgrade some of the division’s property, plant & equipment. The financial details of the
proposal are as follows:
New Equipment
Estimated cost
Estimated after-tax annual savings
Estimated life $2,000,000
$300,000
10 years Old equipment to be replaced
Original cost
Original estimate of life
Present age
Present book
Salvage value $1,500,000
10 years
7 years
$450,000
$0 If the project is accepted, the new equipment will be purchased on January 1 st, 2013.
Analysis done by the senior management of DEF Corporation has determined that the acquisition of
the new equipment would improve the company’s overall ROI. The manager of Division D is
compensated with a base salary and is also eligible for a bonus if the Division’s ROI is higher than
what was budgeted. (Budgeted ROI can be determined by analyzing the status quo situation.)
Required:
1. Calculate the anticipated ROI for 2013 and 2014, under the following conditions:
a)
Assume the investment in property, plant & equipment assets is
accounted for on a gross book value basis for purposes of the ROA
calculation.
b)
Assume the investment in property, plant & equipment is accounted for on a net book
value basis for purposes of the ROA calculation.
c)
Based on your calculations in part (a), is the manager likely to acquire the new
equipment?
2. Calculate the actual ROI for 2013 and 2014 assuming the investment is overrun by $500,000
and the annual savings are only $200,000 and assuming the following conditions:
a)
Assume the investment in property, plant & equipment is accounted for on a gross book
value basis for purposes of the ROI calculation.
b)
Assume the investment in property, plant & equipment is accounted for on a net book
value basis for purposes of the ROI calculation. 3. Regardless of your analysis in part 1, assume that the manager of Division D decides not to
undertake the proposal. What action, if any, should the senior management of DEF
Corporation undertake? Explain. 1.
2.
3.