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Hi Tutor,
I am trying to understand how BPP got the ROI to be 13.3% with the information provided. I went through your lecture and you did not show how to get the ROI from non-current asset using depreciation. Do you mind explain this here
Thank you,
I only have the current edition of the BPP Revision Kit, and if you mean question 98 in the Revision Kit then that question has nothing to do with the ROI.
Hi John,
Question 98 was in the bpp textbook, but for the revision kit it is question 272. It has ROI using non current asset and depreciation in bpp revision in the 272. I’m not quite sure where I can get the lecture that explains getting the ROI using non current assets and depreciation method
I think. you must be using an older edition of the Revision Kit, because question 272 in the current edition is about transfer pricing.
The question you refer to might be in the current edition but with a different question number. If you type out the first line of the question then I will look to see if it is there.
This is what I got on 272,
At the beginning of 20X2, a division has capital employed, consisting of non-current assets of $2 million (at net book value) and working capital of $0.2 million. These are expected to earn a profit in 20X2 of $0.5 million, after depreciation of $0.4 million. A new machine will be installed at the beginning of 20X2. It will cost $0.8 million and will require an additional $0.1 million in working capital. It will add $0.35 million to divisional profits before deducting depreciation. This machine will have a four-year life and no residual value: depreciation is by the straight-line method. When calculating ROI, capital employed is taken at its mid-year
value.
What is the expected ROI of the division in 20X2?
? 21.7%
? 23.2%
? 24.1%
? 26.0%It is question 282 in the current edition 🙂
The capital employed at the start of the year is defined by the question as being 2 + 0.2 = $2.2. The immediately buy a new machine for 0.8 and increase working capital by 0.1.
So they start the year with capital employed of 2.2 + 0.8 + 0.1 = 3.1.Calculating the capital employed at the end of the year is Paper FA (was F3) knowledge, not PM knowledge. Non-current assets (and therefore the capital employed) will reduce by the depreciation of 0.4 on the original NCA’s and depreciation of 0.8 / 4 = 0.2 on the new asset.
Therefore the capital employed at the end of the year will be 3.1 – 0.4 – 0.2 = 2.5
So the average capital employed (as required in the question) is (3.1 + 2.5) / 2 = $2.8M
tjama’s original question said that there was no lecture on depreciation in the Paper PM lectures. That is true, but it is because the calculation of the depreciation and the fact that it reduces the non-current assets (and therefore the capital employed) is basic Paper FA.
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