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Accepting a project based on RI

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Accepting a project based on RI

  • This topic has 8 replies, 4 voices, and was last updated 10 years ago by John Moffat.
Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
    Posts
  • March 5, 2015 at 8:12 pm #231417
    Vicki
    Member
    • Topics: 20
    • Replies: 33
    • ☆☆

    Hi All,

    Question:

    “Division A of Aigburth Co is considering a project which will increase annual net profit after tax by $30,000 but will require average inventory levels to increase by $200,000. The current target rate of return on investments is 13% and the imputed interest cost of capital is 12%

    Based on the ROI and/or RI criteria, would the project be accepted?

    Answer:
    ROI- Yes
    RI – Yes

    ROI calculated at 15% – accept
    RI calculated at $6000 – accept

    My question is, on what basis would you accept a project when calculating RI?

    I understand why you would accept on ROI as it is higher then the target rate, but the calculated RI is $6000 and I am not sure why they have accepted on that basis? Please help!

    Thanks,

    Vicki

    March 5, 2015 at 9:31 pm #231422
    Farzana sultana
    Member
    • Topics: 19
    • Replies: 43
    • ☆☆

    If the RI is positive then it’s accepted or if its negative then it wnt b accepted

    March 6, 2015 at 8:42 am #231446
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    Farzana: Please do not answer in the Ask the Tutor Forum

    Vicki: Farzana is correct in that if the RI is positive them we accept. It is because the investment of 200,000 is earning 30,000, which is more than the interest cost of 200,000 x 12% = 24,000.
    RI is simply checking whether or not the investment is earning more than the cost of money of (in this case) 12%. If it is earning more then the RI will be positive and we accept; if it is earning less then the RI will be negative and we reject.

    March 6, 2015 at 1:38 pm #231492
    Vicki
    Member
    • Topics: 20
    • Replies: 33
    • ☆☆

    Thanks John

    (and Farzana)

    That makes sense 🙂

    March 6, 2015 at 3:29 pm #231508
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome 🙂

    March 6, 2015 at 3:44 pm #231521
    Molly Sum
    Participant
    • Topics: 39
    • Replies: 53
    • ☆☆

    I would like to ask, if the ROI and RI compare which one is better? Why? Thank you.

    March 6, 2015 at 3:48 pm #231525
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    It is not a question of one being better – there is no ‘best’ one. It depends what we are doing with it.
    If you watch the lecture I explain this and talk about the advantages and disadvantages.

    March 6, 2015 at 4:23 pm #231534
    Farzana sultana
    Member
    • Topics: 19
    • Replies: 43
    • ☆☆

    John thank you so much for your help . I have passed the exam today got 60% . Without ur help it was impossible to pass. U r really a great lecturer. Ur suggestion is just enough to get good marks n understandable.

    March 6, 2015 at 6:51 pm #231550
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    That’s great Farzana, and many congratulations 🙂

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