Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › PERFORMANCE MEASUREMENT-RESIDUAL INCOME
- This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.
- AuthorPosts
- May 17, 2022 at 12:55 pm #655884
A division is considering investing in capital equipment costing $2.7 million. The useful economic life of the equipment is expected to b 50yrs,with no resale value at the end of the period. The forecast ROI is 15% per annum before depreciation. The division’s cost of capital is 7%?
The answer was
Divisional profit before depreciation=2.7m x 15%=$405,000 per year
Less depreciation=$2.7m x1/50=$54,000 per year
Divisional profit after depreciation=$351,000
Imputed interest=$2.7m x 7%=$189,000
Residual income= $162,000Good day sir,Pls I don’t understand why they used the capital equipment value without depreciation to calculate the imputed interest.
May 17, 2022 at 4:58 pm #655905The forecast divisional profit has been calculated after depreciation.
The imputed interest is calculated on the amount that they are considering investing, which is $2.7M.
May 18, 2022 at 8:49 pm #655998Thank you sir
May 19, 2022 at 7:45 am #656010You are welcome.
- AuthorPosts
- You must be logged in to reply to this topic.