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Dear Sir,
I am confused about the average accounting profit which is used to calculate ROCE based on average investment method.
In the P&R Kit from BPP, questions 90 and 98 (Part D – Investment Appraisal) seem to be similar, however in the answers it is stated that in 90 we don’t deduct depreciation as it is already deducted because it is accounting profit so no adjustments here, and in answer to question 98 the depreciation is deducted. Could you please explain why is that and what is the difference between these two questions actually?
Thank you in advance for prompt response.
Kind regards,
scarletoIn question 90, the question gives the profits, and profits are always after charging depreciation.
In question 98, you are not given the profits. You are given the payback period and therefore you can calculate the cash flows each year (payback period is a cash measure), and cash flows are before depreciation (because depreciation is not a cash flow). To get the profit we need to subtract the depreciation from the cash flows.
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