2 NCL plc, which has a divisionalised structure, undertakes civil engineering and mining a

2 NCL plc, which has a divisionalised structure, undertakes civil engineering and mining activities. All applications by

divisional management teams for funds with which to undertake capital projects require the authorisation of the board

of directors of NCL plc. Once authorisation has been granted to a capital application, divisional management teams

are allowed to choose the project for investment.

Under the terms of the management incentive plan, which is currently in operation, the managers of each division

are eligible to receive annual bonus payments which are calculated by reference to the return on investment (ROI)

earned during each of the first two years by new investments. ROI is calculated using the average capital employed

during the year. NCL plc depreciates its investments on a straight-line basis.

One of the most profitable divisions during recent years has been the IOA Division, which is engaged in the mining

of precious metals. The management of the IOA Division is currently evaluating three projects relating to the extraction

of substance ‘xxx’ from different areas in its country of operation. The management of the IOA Division has been given

approval by the board of directors of NCL plc to spend £24 million on one of the three proposals it is considering (i.e.

North, East and South projects).

The following net present value (NPV) calculations have been prepared by the management accountant of the IOA

Division.

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  • 提问人:00****24
  • 发布时间:2018-04-17
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(b) Explain how the adoption of residual income (RI) using the annuity method of depreciation might prove tobe a superior basis for the management incentive plan operated by NCL plc.(N.B. No illustrative calculations should be incorporated into your explanation). (4 marks)
The IOA Division is also considering whether to undertake an investment in the West of the country (the West Project).An initial cash outlay investment of £12 million will be required and a net cash inflow amounting to £5 million isexpected to arise in each of the four years of the life of the project.The activities involved in the West project will cause the local river to become polluted and discoloured due to thedischarge of waste substances from mining operations.It is estimated that at the end of year four a cash outlay of £2 million would be required to restore the river to itsoriginal colour. This would also clear 90% of the pollution caused as a result of the mining activities of the IOADivision.The remaining 10% of the pollution caused as a result of the mining activities of the IOA Division could be clearedup by a further cash outlay of £2 million.(c) Evaluate the West project and, stating your reasons, comment on whether the board of directors of NCL plcshould spend the further £2 million in order to eliminate the remaining 10% of pollution. (6 marks)(Ignore Taxation).

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