2 Alpha Division, which is part of the Delta Group, is considering an investment opportunity to which the following
estimated information relates:
(1) An initial investment of $45m in equipment at the beginning of year 1 will be depreciated on a straight-line basis
over a three-year period with a nil residual value at the end of year 3.
(2) Net operating cash inflows in each of years 1 to 3 will be $12·5m, $18·5m and $27m respectively.
(3) The management accountant of Alpha Division has estimated that the NPV of the investment would be
$1·937m using a cost of capital of 10%.
(4) A bonus scheme which is based on short-term performance evaluation is in operation in all divisions within the
Delta Group.
Required:
(a) (i) Calculate the residual income of the proposed investment and comment briefly (using ONLY the above
information) on the values obtained in reconciling the short-term and long-term decision views likely to
be adopted by divisional management regarding the viability of the proposed investment. (6 marks)