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Residual Income and Return of Investment

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Residual Income and Return of Investment

  • This topic has 1 reply, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • October 18, 2014 at 1:57 pm #204843
    Mandip
    Member
    • Topics: 19
    • Replies: 15
    • ☆

    Hi, I need some help with the below question which was in the June 2012 exam paper.

    “An investment centre earns a ROI of 18% and a residual income (RI) of £300,000. The cost of capital is 15%. A new project offers a return on capital employed 17%.

    If the new project were adopted, what would happen to the investment centre’s return on investment and RI?

    Return on Investment: Increase or Decrease?
    Residual Income: Increase or Decrease?”

    The answer is ROI Decreases and RI increases but i am having trouble understanding how.

    It is my knowledge that Return of Capital Employed is the same as Return of Investment so 17%-18% = -1% so ROI decreases.

    But having great difficulty understanding how RI increases.

    Thanks

    October 18, 2014 at 7:44 pm #204875
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54708
    • ☆☆☆☆☆

    You have asked this in two places – please do not do that.

    I have answered your question in the other forum.

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    Posts
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