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In a calculation for residual income and return on investment there’s a new investment worth 6.2 million and zero residual value after 4 years . There’s net cash flow for the investment which is 1.3 for next 4 years . I can’t understand how to get to profit here ? Answer says 1.3- 6.2/4 why is that
As you should remember from Paper FA (was F3), the cash flow is before depreciation (because depreciation is not a cash flow).
The profit is always after charging depreciation, and if the investment cost 6.2M and is lasting 4 years, then the depreciation per year is 6.2M/4.
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