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Return on Capital Employed, Residual Income & Balanced Score Card

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(i)Critically evaluate the use of return on capital employed (ROCE) as a measure of divisional performance on the company's divisions (30%)

(ii)Demonstrate whether the move to residual income (RI) as a key indicator of divisional performance would resolve any of the conflicts relating to the capital expenditure proposals being considered for both the Pumps and Forging Divisions.(15%)

(iii)Evaluate if the application a balanced scorecard approach (Kaplan and Norton, 1992 on) may be useful to the company for use at divisional level. (15%)

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The role should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce the share holders' earring.

The capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities or fixed assets plus working capital.

Return on assets = Net income / average total assets
= $732.5 ($ 5695.5+$5721.9)
= 12.8%

Pumps division financial results
1998 1999 2000 2001 2002
Net current assets = 15 17 18 19 20
Fixed assets = 18 20 21 25 26
Net assets = 33 37 39 44 46
Role = 18% 21.7% 20.4% 20.4% 21.7%

Corporate financial results:

Consider a firm that has turned a profit of $ 15 on $100 capital employed, or 15% ROLE of the $100 capital employed, let's say $40 was cash if recently raised and has yet to guest into operation. If we ignore this latent cash in hand, the capital is actually ...

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This solution provides a detailed analysis of the given economics questions.