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Hi sir . I have question.
An investment division currently has net assets of £500000 and is earning profits of £70000 per annum. The divisional manager is considering a new investment which will cost £20000 and will generate additional profits of £2200 per annum. The company has a cost of finance of £10%.. What is the residual income (RI) for division with and without the new investment?? Calculations
Without the new investment, RI=20000-(10%*500000)=(30000)
With the new investment RI=22200-(10%*520000)=(29800).My question is we know RI= profit -( investment* cost of capital).why we use 200000 , why not £70000 profit we don’t use??
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