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Violet Ltd ('Violet') is pursuing an aggressive growth objective. Divisional personnel are encouraged to identify, develop and pursue investment opportunities. Capital is allocated by the CEO subject to availability and the alignment of the division's activities with Violet's business strategy. The performance of divisional managers is assessed using residual income (RI) where the hurdle rate to be used is 8%.

The CEO is keen for all divisional managers to gain experience across the organisation. It's normal for divisional managers to be re-appointed to a different division every 3 to 5 years. Fraydis has been the manager of the Southern Cross Division for a three years. Southern Cross focusses on the production of breakfast cereals and other mostly wheat-based food products. Southern Cross has assets of $20 million and an expected ROI of 12.6%. Fraydis is looking forward to a favourable performance evaluation, to improve her chances of re-appointment to one of the larger divisions and ideally, higher remuneration.

Three investment opportunities have been presented to Fraydis:

Project A Project B Project C A $2.5 million refurbishment of one of Southern Cross's production lines to extend its useful life by at least 3 years The investment is expected to yield an annual ROI of 13.5% for each of the 3 years, after which an upgrade will be required. A $5 million acquisition of a business with technologythat would significantly enhance Southern Cross's current capabilities Southern Cross's engineers have advised that the acquisition is not expected to generate prots in the rst two years, because of the cost of integration into Southern Cross's core operations. The expected internal rate of return over the lyear life of the project is 15% per annum. A $4 million replacement of one of Southern Cross's production lines which has become unreliable. The proposed replacement is an automated line that will produce higher quality product at lower operating costs. Significant training is required to get operating and maintenance crews up to speed. The investment is expected to yield an annual ROI of 9.5% for the first two years and 15% over the useful life of 10 years

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