ABC manufactures door frames which it supplies mostly to house builders. The board of Jack is thinking of implementing a Balanced Scorecard (BSC) to help it manage its strategic performance. Detailed below are the financial performance measures currently used and the Board are looking for your help in the calculation of Residual Income (RI) and Return on Capital Employed (ROCE).
Y/E 31/12/2019 | Y/E 31/12/2018 | |
$000 | $000 | |
Revenue | 510 | 543 |
Cost of sales | 320 | 300 |
Gross profit | 190 | 243 |
Other operating costs | 99 | 90 |
Operating profit | 91 | 153 |
Finance cost | 26 | 20 |
Profit before tax | 65 | 133 |
Tax | 11 | 27 |
Profit after tax | 54 | 106 |
Non-current assets | 640 | 530 |
Current assets | 380 | 325 |
Current liabilities | 45 | 32 |
Non-current liabilities | 190 | 100 |
WACC | 9% | 9% |
Jack is also considering an investment to enhance production. This investment will shorten production time and reduce costs by the use of digital technology. The investment will have a useful life of four years, after which it will have a scrap value of $0. The financial details on this investment are listed below:
Investment:
Initial cost $86.4 million
Net cash inflow $30 million per annum
Cost of capital 9%
Depreciation policy Straight line
For information:
ROI is calculated using controllable profit. Controllable profit is calculated as net cash flows less depreciation.
For future planning purposes, ROI and Residual Income (RI) are calculated using the opening written down value of plant and licence assets in each year.
The Net Present Value (NPV) for the investment is positive.
Required:
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