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TOPIC: Profit after depreciation as a % of net assets employed
Question:
A new company has non-current assets of $460,000 which will be depreciated to nil on a straight line basis over 10 years. Net current assets will consistently be $75,000, and annual profit will consistently be $30,000. ROI is measured as return on net assets.
Required : Calculate the ROI in year 2 and year 6
I know the answer (year 2 : 6.8% and year 6: 11.6%) but I do not know how they got the answer. Can you please show workings?
There is depreciation of 460,000/10 = 46,000 per year.
Therefore after 2 years, the book value of the non-current assets = 460,000 – (2 x 46,000) = 368,000.
So total net assets after 2 years = 368,000 + 75,000 = 443,000
Profit = 30,000
Therefore ROI after 2 years is 30,000/443,000 = 6.8%
You should now have no problem repeating this to find out the ROI after 6 years.
Have you watched my free lectures on ROI and RI? The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
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