Mathematically speaking, all other parts of the formula remaining constant, increase in divisor will result in a lower rate than without the increase in the divisor. If we add the capital cost of £ 750,750 to the total assets of £ 1,031,919 and with the decrease from profit from next year’s profit of £ 89,580, plus interest of £137,045 in all probability the rate will decrease from current rate of 18% to 12.7% return on capital employed (ROCE). But because of the increase in revenues from £1,338,363 to £1,841,000, then multiplying the difference to .025 (current rates for sales incentive bonus), then the apprehension has no basis. The feared decrease in profit resulting in lower rate ROCE for computing the bonus is more than offset and exceeded by the sales incentive bonus assuming the same rate for computing the sales incentive bonus.
Yes, I consider the proposed extension making a commercial sense on the basis of having a net present value of £ 15,704 when discounted at the cost of capital. Discounting cash flows for any project proposal at the company’s cost of capital and yielding positive net present value (Holmes, 1998) means that there is a net advantage for choosing the project. Financially speaking the project or proposal must be accepted.
The increase in the number of more loyal customers as a result of offering customers better products and services is one qualitative factor that should be considered. Case facts say that the company’s philosophy is to provide a comfortable but not luxurious shopping environment. Making an extension to a store leads to the fulfillment of such philosophy and the increased patronage should be one of the qualitative factors.
Another qualitative factor is the possibility that any proposed capital investment will affect the morale of the managers. Will it motivate the managers or will it create conflict between managers’ personal goals and the goals of the business?