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2012 june – Q-5- Biscuit division
part- dDepreciation for new investment
Depreciation = 2,120,000 – 200,000/48 months = $40,000 per month
$40,000 is deducted from profit each month for 12 month as asked for annual ROI.MY question-
As assets gets older its value depreciates – even depreciation amount for each month has been calculated but why it is not deducted from the capital employed amount (£2.12m)ROI = $3,864k/25,320k = 15·26%
Could you please tell me the reason of not deducting depreciation from the capital employed ?
It is always arguable as to whether to use the opening net assets or the closing net assets (or indeed the average).
The logic of using the opening net assets is that it is the net assets at the start of the period that will generate the profit for the period.
However, if you did subtract the depreciation (and therefore use closing net assets) then you would still get the marks even though obviously your answer would be different.
(Provided, as is always the case, that your workings were clear to the marker).Thanks John for making me clear on the ROI, the answer you have given me will be helpful for my entire career thanks again ….
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