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EF plc has 3 divisions – P, Q and R – whose performance is assessed on return on
investment (ROI). The ROI for the divisions for the coming year is expected to be 24%, 28%
and 23%, respectively. . Three new proposals are now being considered:
(i) P is considering investing $75,000 in order to increase profit by $21,600 each year.
(ii) Q is considering selling a machine, forecast to earn a profit of $2,500 in the coming
year, for its carrying value (NBV) of $7,000.
Which of the following division(s) will REJECT the proposal under consideration because
of its effect on ROI?Sir can you say me the answer why they will reject the second option ?
Q is getting a return on the machine of 2500/7000 = 35.7%. This is more than the 28% they are getting overall and so they will want to keep the machine.
The proposal in (ii) is to sell the machine, but they want to keep it so they will reject the proposal.
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