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Hi John,
I hope you could help me with this queston. I am very confused:
At the beginning of 20×2 a division has capital emoployed consiting od NCA of 2m (NBV)
and working capital of 0.2m. These are expected to earn a profit of 20×2 of .05m, afetr deprection of 0.4m. A new machine will be installed at the beginning of 20×2. It will cost 0.8m and will require an additional 0.1m in working capital. It will add 0.35m to divisional profits before deducting deprecation. This machine will hace 4 year life and no residual value: deprecation is by the straigh- line method. When calculationg ROI, capital employed is taken as its mid year value.
What is expected ROI of the division in 20×2?The asnwer is:
Capital employed: at start 20×2: 2m+ 0.2m+0.8m+ 0.1=3.1m
Capital employed at the end 20×2: 1.6m+0.2m +0.6m+0.1m=2.5m
Mid year Capital employed=(3.1+2.5)/2=2.8
profit: 0.5+0.35-deprecation 0.2=0.65mROI=0.65/2.8=23.2%
What I dont understand is where the figures for capital employed are comining from?
This probably very simple but I have lost it at some stage….
Coul could please help?
Thank you so much,
Anna
A new machine is installed at the beginning of the year.
Therefore the capital employed at the start of the year is 2 + 0.2 + 0.8 + 0.1 = 3.1M
(the first two are the opening capital employed and the second two are the new machine that was installed right at the start of the year).The closing capital employed is the same as the opening figure, but subtracting depreciation on the existing assets of 0.4M, and subtracting depreciation on the new machine of 0.2M (0.8 / 4).
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