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Average investment

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Average investment

  • This topic has 5 replies, 3 voices, and was last updated 4 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • December 26, 2020 at 4:53 pm #600919
    leo10
    Member
    • Topics: 36
    • Replies: 18
    • ☆☆

    Hi Sir,

    I’d would like a clarification on this question please:

    Equator Co is considering a project that will require an investment in machinery of $40,000. Based on
    market research already undertaken at a cost of $4,000 it is estimated that the project will generate a
    net income of $11,000 in the first year, increasing by 20% each subsequent year. At the end of five
    years’ the machine will be sold for $5,000. Assume cashflows arise at the year-end.

    The solution says it is ROCE 38%. Checking the answer, I get all the numbers right, apart from the final ratio. Here I am fine with the average profit, but in terms of the average investment the solution says it is $22,500. Please could you clarify why not $20,000?

    Thank you
    Leo

    December 27, 2020 at 6:50 am #600935
    iyamu
    Participant
    • Topics: 286
    • Replies: 171
    • ☆☆☆

    Initial investment = 40000
    Scrap value = 5000
    Total = 45000
    Average = 45000/2 = $22,500
    I hope this helps …

    December 27, 2020 at 11:17 am #600956
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    iyamu: Please do not answer in this forum because it is the Ask the Tutor Forum and you are not the tutor (but please do help people in the other Paper FM forum 🙂 ).

    leo10: What iyamu has written is correct 🙂

    December 27, 2020 at 11:22 am #600958
    iyamu
    Participant
    • Topics: 286
    • Replies: 171
    • ☆☆☆

    My sincere apology sir , I mistook it for the forum platform .

    December 27, 2020 at 2:27 pm #600972
    leo10
    Member
    • Topics: 36
    • Replies: 18
    • ☆☆

    Thank you both iyamu and John.

    I understand we add the value of the scrap value to the value of the investment to get to the total investment.

    As a general question, apart from this specific exercise, is there anything else (in addition to the initial investment and scrap value) that we want to include to get to the total investment?

    Thank you

    December 27, 2020 at 3:31 pm #600985
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    iyamu: No problem 🙂

    leo10: Assuming that you are still asking about ROCE/ARR (which is only very rarely asked in Paper FM) and not discounted cash flow (which is always asked in Paper FM), then it is the total capital (which is equal to net assets less current liabilities) unless specifically told differently in the question.

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