ROI

Hi Katie,

For ROI, you are using items from the financial statements. This means that depreciation is already included in PBIT, because depreciation is an expense above the net profit line. Always.

The ambiguous part (not well explained in the books) is this–are you using:

a) Opening Investment (which would be before annual Dpn charge)

or

🙂 closing investment (which is AFTER the annual DPN charge).

This is confusing.

Look at question Pace Dec 2008 (I think) part C. You can see this issue, and the assumption in the model answer is investment BEFORE Dpn, or OPENING net book value.

With ROCE, ROI, ARR (all essentially the same thing) you can calculate it different ways (e.g. average investment, opening investment, closing investment, etc…). The important point is to tell the user the method you use, and to be consistent in your calculation. This is a drawback of ROI, that it can be calculated different ways, and that it is distorted by accounting policies.

But, don’t miss the big picture with F5–the calculation is only a start. The most important part is to relate it to the performance management problem in the case study.