Evaluate the proposal to expand the Dairy Division for a one-year period. Based on ROI and RI analysis, advise management on whether the project…

Evaluation of Expansion Proposal for frozen desserts - Dairy Division, Hoshiarpur, Punjab ROI/ RI for proposed expansion (for first year) Particulars Amount in ₹ a. Additional investment in plant and equipment 1,75,00,000 b. Depreciation for first year on the above investment (15%) 26,25,000 c. Net book value of additional investment in plant and equipment at reporting date (a-b) 1,48,75,000 d. Additional net current assets 25,00,000 e. Total additional investment (c)+(d) 1,73,75,000 f. Additional contribution 95,00,000 g. Additional fixed cost 8,50,000 h. Net addition to earning (f)-(g)-(b) 60,25,000 i. ROI [(h)/(e)×100] 34.68% j. Required return [9% of (e)] 15,63,750 k. RI [(h)-(j)] 44,61,250 Advise ROI Criteria – Management of VEN private limited must expand the business of Dairy Division by venturing into manufacturing of frozen desserts, because the proposed expansion expected to generate ROI at rate of 34.68%, which is not only more than existing ROI of Dairy Division (11%) but also more than overall ROI as well (because among the three division the maximum ROI generated by Crop Protection Division i.e., 21.6%). RI Criteria – Management of VEN private limited must expand the business of Dairy Division by venturing into manufacturing of frozen desserts, because the proposed expansion expected to generate additional RI of 44,61,250.