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Return on Investment (ROI) and Residual Income (RI) – ACCA Performance Management (PM)

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  2. Hello John, if we are using RI with a rate of 15% to see whether the goal would be congruent. Wouldn’t it be the same if we tell the divisional manager that the ROI should be above 15%, instead of measuring it against the current ROI (16.4%)? Both methods would be congruent then.

  4. Hello there! I hope you are doing great. I have a very serious query on 2nd example on ROI . No where in the example there is mentioned that is been judged on the increasing ROI and event though the ROI has decreased a little why is that considered to be bad. The division would be making an extra profit of 16000 while remaining under the provided ROI target by the company itself. What I really want to know is when this sort of question is asked in exam will there be a mention of targets from both company and manager ?

    • In an exam question you would either be told a target return or you would use the current return of the company as the target.
      If a company is using ROI as a measure then almost be definition they want the ROI to increase, otherwise they would be using a different measure.

  6. My question is that as in the 2nd example for residual income the profit was 16000 but if it was 15000 then with and without new investment the residual income will be the same 7000 then will the manager accepts the project as it doesnt increases the for him but its achiving the company’s target

    • The manager would be indifferent as to whether or not to accept (and so would the company – the fact that their target is 15% means that they want projects giving more than 15%, they don’t want projects giving less than 15%, and they are indifferent to those that give 15% 馃檪 )

  7. Hi I’m hoping someone can help. Question 272 from BPP question book (section a type question on ROI) the capital employed is taken at mid year. In the solution for the profit they deduct 0.2 million and I can’t figure out at all where/why this is deducted. Would be grateful for any help, Many thanks

      • Please repost this in forum (tutor or student help) and not as a lecture comment.
        Also need the full question to able to tell you why depreciation was deducted.
        (Although, generally, depreciation expense is deducted in the income statement to get profit. -Even though it is not a cash flow)

    • Roi = controllable profit / capital employed
      Controllable profit = net profit before interest and tax but after depreciation.
      Ref to your question, you purchased purchased machinery worth $8000000 + require working capital of $1000000
      Now remember, dep will be charged on $8000000 not $900000.dep will be charged for four years so dep will be 8000000/4 = 200000
      As we know , we deduct depreciation from controllable profit so we will deduct this 200000.

  9. Hi sir
    Thank you for the lecture
    I have got one question. When it was roi manager rejected the new investment because the 2nd roi was smaller than 1st roi. However when we came to RI manager accepted 2nd RI even though it was smaller than 1st RI. Can you please explain this situation?

  11. Hi Sir,
    I wanted to ask:

    In the second example, the new investment gives a lower return than the current ROI, isn’t the manager acting favorably from the viewpoint of the company even though he is making the decisions based on whether he will be rewarded or not?

    my point is, even though the manager is making decisions based on whats good for him, in the second example, why would not going for a lower ROI be not goal congruent?

    Thank you

    • Although the company does want the investment (because it gives more than the target return), if the manager is being measured on ROI then he will reject the project because the ROI on which he is measured will be lower.

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