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Hello Tutor,I have two question about the answer from the past year paper which is from June 2012,Question 5 part (D)
The answer state that as the RI (recalculated) is actually lower than without the investment,the investment will not be undertaken(From the manager ‘s perspective)Q: is it true for making the decision by using RI just because it is lower than ever but not based on only the positive value?is it we should accept the investment if it produces a positive figure?
And from the company perspective , to calculate the RI of the investment alone,how to get the 132k figure?(the net profit)
Thank you very much as always 🙂
You are confusing two things.
If the RI of the investment on its own is positive, then we should accept.
If the RI of the investment is positive then the RI of the division overall will increase.If the RI of the investment on its own is negative then the RI of the division overall will fall and we should reject.
The machinery gives extra contribution of 8.5% x 600 = 51 per month, which is 12 x 51 = 612 per year.
There is depreciation of (2120-200)/4 = 480 per year.
Therefore the profit is 612 – 480 = 132.
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