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1. F9 VALUATIONS
QUESTION 20 ARMCLIFF CO. KAPLAN EXAM KIT 2013-20141. About the CURRENT Capital Employed:
The answer present it as per: 20/(75+25)*100 = 20%.
For me the calculation will be: (20/75)*100 = 26%
2. About the depreciation
The answer includes it
As far as i understood I do not use it, I AM CONFUSED.
3. About the Capital Employed TO BE CALCULATED:
The answer present it: The 14,000 reduced by 3,0000 (depreciation) each year.
The question says “ Higher production levels will require additonal investment in inventories of $0.5m.
What are the words that indicate that I have to place (add) this inventory since year 1?
I am confused about this method of calculating the CAPITAL Employed, because I would do it as the formula says (initial cap+scrap)/2.
It is what is said on par A of the question: Using the average rate of return on capital method
For me the calculation would be : ARR=(585/4)/(14+2)/2
Thanks for reading this,the question stipulates that the formula to use is average profit(over 4 years) divided by capital employed(not average investment).capital employed=total assets less current liabilities(in question it is stated to ignore receivables & payables)hence 75 + 25.hope this helps.
ARR uses accounting profit and hence depreciation should be used. This question is really an eye-opener for me. The examiner just throws in so much stuff to look out for. The calculation of depreciation ($14million – residual value $2million)/ 4 years = $3million per annum. I suppose we can make an assumption that production will only be effective from year 1 – that is a good question. The capital employed to be used was as per the specifications of the requirements in the question – please clarify on how you calculated the 585 amount because the detailed workings for profit will not work to be this amount. The calculation of current capital employed of (75 +25) is a good one – I surely could have missed that ( but the question said to ignore receivables and payables, if we had considered these two variables then the capital employed should have been 88. This is a fantastic question.
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