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Sir there is a question in mock exam on ROI
At the end of 20X1,an investment centre has net assets of $1m a d operating profit of $190000.however the bookkeeper forgot to account the following.
A machine with a net book value of 40000 was sold at the start of the year for 50000 and replaced with a machine costing 250000.both the purchase and sale are cash transactions.No depreciation is charged in the year of purchase or disposal.The investment centre calculates return on investment (ROI) based on closing net assets.What is roi for the year.
Sir I am not getting the concept.please if you can help me with the concept along with the solution.ThanksI do not know what you mean by ‘concept’ because I explain ROI in my free lectures – it is the profit expressed as a percentage of the net assets of the division.
They forgot to account for the sale of the machine when calculating the profit. The sale gave a profit of $10,000 and to the correct profit is $200,000.
The sale of the machine reduces the net assets by the NBV of $40,000 and increases net assets by the cash received of $50,000.
The purchase of the new machine does not affect the net assets because although the non-current assets increase by $250,000, the cash falls by $250,000.Therefore the closing net assets are $1M + $10,000 = $1,010,000.
So the ROI = 200,000/1,010,000 = 19.80%
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