Bersatu Berhad splits into two divisions, A and B, each with their own cost and revenue streams. Each of the divisions is managed by a divisional manager who has the power to make all investment decisions within the division. The cost of capital for both divisions is 12%. Historically, investment decisions have been made by calculating the return on investment (ROI) of any opportunities and at present.A new manager who has recently been appointed in division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company. Each division is currently considering the following separate investments: Project for Division A Project for Division B Capital requirement for investment RM 82.8 million RM40.6 million Sales generated by investment Rm44.6 million Rm21.8 million Net profit margin 28% 33% The company is seeking to maximise shareholder wealth. Required: Calculate both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results, taking into consideration the manager’s views about residual income.
Bersatu Berhad splits into two divisions, A and B, each with their own cost and revenue
streams. Each of the divisions is managed by a divisional manager who has the power to
make all investment decisions within the division. The cost of capital for both divisions is
12%. Historically, investment decisions have been made by calculating the
investment
A new manager who has recently been appointed in division A has argued that using
residual income (RI) to make investment decisions would result in ‘better goal congruence’
throughout the company. Each division is currently considering the following separate
investments:
| Project for Division A | Project for Division B | |
| Capital requirement for investment | RM 82.8 million | RM40.6 million |
| Sales generated by investment | Rm44.6 million | Rm21.8 million |
| Net profit margin | 28% | 33% |
The company is seeking to maximise shareholder wealth.
Required: Calculate both the return on investment and residual income of the new
investment for each of the two divisions. Comment on these results, taking into
consideration the manager’s views about residual income.
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