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Hi Sir,
I’m confused in this question from BPP Kit, I don’t get the logic behind how RI will increase if we accept the new project.Question:
An investment center earns a return on investment of 18% and a residual income of $300,000. The cost of capital is 15%. A new project offers a return on capital employed of 17%.If the new project were adopted, what would happen to the investment center’s return on investment and residual income?
Thankyou.
The profit from the new project will be 17% of the capital invested.
The notional interest charge when calculating the RI will be 15% of the capital invested.Since the profit is higher than the interest, the RI for the new project will be positive.
It will therefore increase the RI for the division as a whole.
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thank you so much. Much Clear now. yeah sir I have watched your videos and it has helped me a lot. Thank you again.
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