- This topic has 3 replies, 2 voices, and was last updated 3 years ago by
.
- Posts
- Topics: 1
- Replies: 1
- ☆
Good day. I have this question that i am stuck with on ROCE.
Mike and Molly are considering investing in a restaurant business in leeds through the purchase of Nandos which will cost them £350 000.00 and a further £150 000.00 to refurbish the premises with new equipment. Cash flow projections for the business below.
Year. Net cash flows £
1. 70 000
2. 70 000
3. 80 000
4. 100 000
5. 100 000
6. 120 000The equipment will be depreciated to zero over the period and Mike and Molly are confident that they could sell the business for £350 000.00 after the sith year.
What is the projects return on capital employed(roce)?
What confuses me is the refurbishment cost.
My calculation is a follows
350000+150000= 500000
Divided by 2 is the avg investment of 250000
I calculate the cashflows = 540000 /6 = 90000 avg cash earnings
Depreciation is 0
So roce = (90000-0)/250000 = 0.36 or 36%Am i correct or did i not understand the concept
Firstly the initial investment is 500,000 and the sales value at the end of the 6 years is 350,000.
Therefore the average investment is (500,000 + 350,000) / 2 = 425,000.Secondly, you write that the depreciation is 0. However the question says that the new equipment is depreciated to zero and is therefore 150,000 / 6 = 25,000 per year.
(Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations.)
- Topics: 1
- Replies: 1
- ☆
my Lecture did not teach this topic only gave notes on it and i tried to understand the concept but dont get get it right
- You must be logged in to reply to this topic.