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BPP Revision Kit Question 276(Box Co)
Box Co has an operating profit of $20,000, and operating assets of $95,000. The cost of capital is 12%. There is a proposed investment of $10,000 which will increase the operating profit by $1,400
What is the RI with and without the proposed investment?Answer:
. Before Investment. After Investment
$ Divisional profit . 20,000. 21,400
Depreciation. (850)
Imputed interest (12% of $95,000). (11,400)
Imputed interest (12% of $105,000). (12,600)
Residual income. 8,600. 7,950My question is how and why did they calculate the depreciation(850) after the investment
I think you must be using an old edition of the BPP Revision Kit, and it is a mistake in the answer.
In the current edition it is question 296 – the question is exactly the same, but there is no mention of depreciation in the answer.
The answer in the current edition shows RI of 8,600 before investment, and 8,800 after investment (i.e. no mention of depreciation) 🙂
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