Polyester division of Quintex Ltd has forecast a net profit before tax of N$3 million per annum for the next five years, based on net capital employed of N$10 million. Plant replacement over this period is expected to be equal to the annual depreciation each year. These figures compare well with the group’s required rate of return of 20% before tax. Polyester’s management is currently considering a substantial expansion of its manufacturing capacity to cope with the forecast demands of a new customer. • The customer is prepared to offer a five-year contract providing Polyester with annual sales of N$2 million. • In order to meet this contract, a total additional capital outlay of N$2 million is envisaged, being N$1.5 million of new fixed assets plus N$0.5 million of working capital. The plant life is expected to be 5 years with zero scrap value. • Operating costs for the contract are estimated to be N$1.35 million per annum, excluding depreciation. • This is considered to be a low-risk venture as the contract would be firm for 5 years and the manufacturing processes are well understood within Polyester. • The consequences of income tax on the proposal may be ignored. Required: Calculate the impact of accepting the contract on Polyester division’s: a) Return on investment (ROI) for each of the 5 years b) Residual income (RI), using 20% imputed interest rate, using average capital employed per annum, and say, with reasons, for each method whether or not it would be attractive to Polyester division’s management