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Hi Sir,
I’d would like a clarification on this question please:
Equator Co is considering a project that will require an investment in machinery of $40,000. Based on
market research already undertaken at a cost of $4,000 it is estimated that the project will generate a
net income of $11,000 in the first year, increasing by 20% each subsequent year. At the end of five
years’ the machine will be sold for $5,000. Assume cashflows arise at the year-end.The solution says it is ROCE 38%. Checking the answer, I get all the numbers right, apart from the final ratio. Here I am fine with the average profit, but in terms of the average investment the solution says it is $22,500. Please could you clarify why not $20,000?
Thank you
LeoInitial investment = 40000
Scrap value = 5000
Total = 45000
Average = 45000/2 = $22,500
I hope this helps …iyamu: Please do not answer in this forum because it is the Ask the Tutor Forum and you are not the tutor (but please do help people in the other Paper FM forum 🙂 ).
leo10: What iyamu has written is correct 🙂
Thank you both iyamu and John.
I understand we add the value of the scrap value to the value of the investment to get to the total investment.
As a general question, apart from this specific exercise, is there anything else (in addition to the initial investment and scrap value) that we want to include to get to the total investment?
Thank you
iyamu: No problem 🙂
leo10: Assuming that you are still asking about ROCE/ARR (which is only very rarely asked in Paper FM) and not discounted cash flow (which is always asked in Paper FM), then it is the total capital (which is equal to net assets less current liabilities) unless specifically told differently in the question.
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