Math Problem Solver

The Zama Division is manufacturer of glasses for patients who are visually impaired and its products are sold all over pharmaceuticals retailers in Zimbabwe. Managers in the Group of companies are rewarded annual bonuses using Return on Investments. ROI in the Group is measured as accounting profits divided by the net book value of assets at the beginning of the year. In recent years, Zama Divisional manager has managed to achieve a ROI of 12% per annum, and the cost of capital is 5% per annum. Zama Division has developed a new range of sun glasses and the products has performed well its recent marketing trials by the research and development team of Zama division. Production of sun glasses require a new investment in equipment which would cost $200,000 (payable immediately) and would have a 4-year useful life with nil residual value at the end of that time. The net cash inflows to the division at the end of each of the four years would be as follows:Year 1 Year 2 Year 3 Year 4$40,000 $60,000 $70,000 $76,000REQUIRED:(a) Evaluate whether the Division Manager of Zama is likely to accept the proposed investment in new product and whether the decision will lead to the maximisation of shareholder wealth. Justify of your reasoning supported by appropriate calculations. (16 marks).(b) Mr Zimuto , CEO, is considering to use Residual Income as the performance measure as an alternative system of performance evaluation in order to motivate goal congruent decision-making by the Zama divisional manager. Evaluate with appropriate supporting calculations where appropriate the proposed option by CEO (9 marks)