Q2 – I worked out that the RI is higher for Y so therefore this should be the answer, but the comment says that this is wrong and the answer is X. Could you please explain, thank you

Yes – you have answered your own question 🙂
(I do suggest that you watch the free lectures on this – our free lectures are a complete course and cover everything needed to be able to pass the exam well 🙂 )

Q2
dont we have to compare residual income with the current return on investment decision?, and if we do have to then even division x wouldn’t choose to invest as it is lower than current

No need to assess your decision based on ROI because the question says If the residual income used for as the basis for investment decision, therefore, ROI is a distractor factor

nubian73 says

Q2 – I worked out that the RI is higher for Y so therefore this should be the answer, but the comment says that this is wrong and the answer is X. Could you please explain, thank you

nubian73 says

Ignore my question, I have just figured out what I did wrong!!!

John Moffat says

No problem – I am pleased that you have figured it out 🙂

olajumoke says

Hi John,

please can you explain why return on investment % is used against capital investment to generate profit instead of sales in question 5?

John Moffat says

Because the definition of ROI is profit as a % of the investment.

Have you watched the free lectures on divisional performance measurement?

caroline says

Please help..how do i convert cashflows into profits if the only infomation i have been given is the net present value for the years.?

John Moffat says

I have no idea which question you are referring to!!

Have you watched my free lectures before attempting this test?

jp says

Hi Sir,

Please can you explain Q2, I have the same answer as the comment above and am unsure as to why the answer says Division Y?

Thanks

jp says

RI is higher for Division Y hence why it is accepted, have I answered my own question?

John Moffat says

Yes – you have answered your own question 🙂

(I do suggest that you watch the free lectures on this – our free lectures are a complete course and cover everything needed to be able to pass the exam well 🙂 )

Aisha says

Q2

dont we have to compare residual income with the current return on investment decision?, and if we do have to then even division x wouldn’t choose to invest as it is lower than current

John Moffat says

No you don’t. The question asks what the decisions would be if they were based on residual income.

John Moffat says

That is correct (and the test should have shown it as having been correct when you submitted your answer 🙂 )

Fidelka says

Could anybody help me with solving this question? I don’t understand what to do with Cost of capital…

John Moffat says

Which question (there are 5 of them) ? 🙂

Fidelka says

The second one. About Residual Income. Thank you.

Fidelka says

I solved it as follows:

Division X:

1) $34.56m * 30% = $10.368m – Profit

2) $78.24m * 12% = $9.388’8m – notional interest at target return on amount invested

3) $10.368m – $9.388’8m = $ 0.979m – residual income

– ROI = 13.25% less than current by task

Division Y:

1) $21.12m * 24% = $5.068’8m – Profit

2) $53.28m * 12% = $6.393’6m – notional interest at target return on amount invested

3) $5.068’8m – $6.393’6m = $ (1.324’8m) – residual income

– ROI = 9.51% less than current by task

So only Division X is profitable…

Is it Correct?

Yahya says

No need to assess your decision based on ROI because the question says If the residual income used for as the basis for investment decision, therefore, ROI is a distractor factor