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A company operates a divisional structure. The manager of division D receives a bonus based on the division's annual return on capital employed (ROCE).

A minimum ROCE of 20% must be achieved to receive any bonus and thereafter the bonus increases in line with increases in ROCE.

This year division D achieved a ROCE of 24% and the divisional manager received a large bonus.

The manager is considering an investment in a new machine for next year. The incremental ROCE earned by the machine is expected to be 19% although the ROCE for the division as a whole with the machine is expected to be 22%. Without the machine, ROCE is likely to be stable at 24%.

The cost of capital for the company as a whole is 18% per year.

Which of the following statements is correct?

Options:

The manager will accept the investment because overall the division will earn a ROCE that exceeds the minimum target of 20%.

The manager will reject the investment because it will result in a lower bonus than without the investment.

The manager will accept the investment because it will earn a ROCE that is higher than the company's cost of capital.

The manager will reject the investment because it will result in the receipt of no bonus.

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Question 2

A company has just received the latest in a series of annual payments; this payment was $620. The annual payments are expected to continue for three more years with each payment being increased by the expected rate of inflation. The real cost of capital is 8% per year and the expected rate of inflation is 6% per year.

What is the present value of the future payments the company expects to receive?

Give your answer to the nearest $.

Options:

Question 3

Which TWO of the following expressions are correct?

Options:

1 + money rate = (1 + real rate) x (1 + inflation rate)

1 + real rate = (1 + money rate) / (1 + inflation rate)

1 + real rate = (1 + inflation rate) / (1 + money rate)

1 + money rate = (1 + inflation rate) / (1 + real rate)

1 + inflation rate = (1 + money rate) x (1 + real rate)

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