CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF ENTERPRENUERSHIP AND BUSINESS SCIENCES

DEPARTMENT OF ACCOUNTING AND FINANCE
GROUP 20 PRESENTATION
STUDENT NAMES REG NUMBERS

CHIDHAKWA HOPE C20142563J

MHUNGU BRADLEY C20142152R

MILANZI VERONICA E C20141813S
TEVERA JESSICA C20141324K
MAKURUMURE THELMA C20142114H
SUNHWA LAURA C20142542C
MABVIKO TANYARADZWA C20142715W
KASANGA PROFESSOR C20142845J
NHOPI ANESU R C20143269S
MAPOPE PRIMROSE C20141889P
MAZONYANYA TARIRO C20142055J
ZIMUTO FORTUNATE C20142434J
(a) ROI = Controllable (traceable) profit/Controllable (traceable)
investment * 100
YEAR 1 YEAR 2 YEAR 3 YEAR 4

Sales (1500 * 18) 270 000 270 000 270 000 270 000

Variable cost (180 000) (180 000) (180 000) (180 000)
(15 000 * 12)
Fixed costs (50 000) (50 000) (50 000) (50 000)
(Excl depreciation)
Depreciation (25 000) (25 000) (25 000) (25 000)
(100 000/4 years)
Gain on disposal 20 000

Profit 15 000 15 000 15 000 35 000

Controllable Investment
YEAR 1 YEAR 2 YEAR 3 YEAR 4

Fixed costs 100 000 75 000 50 000 25 000

Working capital 50 000 50 000 50 000 50 000

Controllable 150 000 125 000 100 000 75 000

investment
ROI 10% 12% 15% 46.67%
(Profit/CI * 100)
Comment

The manager will not accept the proposed investment since his
division already earns a ROI of 15% in the absence of the
proposed investment.
Accepting the proposed investment will reduce the average ROI
and it will also affect his performance related bonus
(b) Net Present Value = today's value of expected cashflows –
Value of invested capital
Cashflows
YEAR 0 YEAR 1,2 & 3 YEAR 4
Operating cashflows 40 000 60 000
(Profit +depreciation)
Purchase and sale of fixed 100 000
asset
Working capital 50 000 50 000
Net cashflow 150 000 40 000 110 000
Net Present Value @10%
40 000/ (1+0.1)^1 + 40 000/(1+0.1)^2 + 40 000/(1+0.1)^3 + 110
000/(1+0.1)^4 = 174 605.5597
NPV = 174 605.5597 - 150 000
= 24 605.56
.
.
( c ) The use of ROI as a performance measure does not necessarily
ensure that a division manager will take decisions which are in
shareholders' best interests. Three examples to support the above
point of view are as follows
• ROI may discourage division managers from accepting profitable
investments that have a lower ROI than the division's current ROI,
even if they have a positive NPV.
• ROI may encourage division managers to delay or
postpone investments that have a negative impact on the current
year's ROI, even if they are beneficial in the long run. For
example Maguire may delay the purchase of new machinery or
equipment that could improve the efficiency and quality of the
division's products, because it would increase the
investment base and reduce the current year's ROI. This could harm
the division's competitiveness and profitability in the future.
cont

• ROI may create incentives for division managers to manipulate

the accounting figures to inflate the ROI. For example Maguire
may use accelerated depreciation methods to reduce the net
book value of the fixed assets and increase the ROI. He may
also overstate the revenues or understate the costs to increase
the profit and the ROI. These accounting practices may distort
the true performance of the division and mislead the
stakeholders.