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Capital Budgeting

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Capital Budgeting

  • This topic has 9 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 10 posts - 1 through 10 (of 10 total)
  • Author
    Posts
  • February 26, 2015 at 11:25 am #230310
    rukhsarhussainch
    Member
    • Topics: 6
    • Replies: 15
    • ☆

    Profit before tax is 220000
    Total equity is 3150000
    A loan of 1000000
    Bearing interest rate 8% p.a
    What is pre tax return on capital employed ?

    February 26, 2015 at 11:28 am #230312
    rukhsarhussainch
    Member
    • Topics: 6
    • Replies: 15
    • ☆

    ….
    A divisional manager control assets of 600000
    Other assets valued at 100000 are traceable to division
    The controlable profit for division is 80000
    Cost of capital is 8%

    What is residual income …
    Is answer is
    $72000

    February 26, 2015 at 12:44 pm #230328
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Do not just set me questions.

    Say where your problem is and then I will try and help,

    (I assume you have watched our free lectures on these topics?)

    February 26, 2015 at 7:16 pm #230510
    Farzana sultana
    Member
    • Topics: 19
    • Replies: 43
    • ☆☆

    for the first question is the answer 6.98%

    February 26, 2015 at 7:25 pm #230512
    Farzana sultana
    Member
    • Topics: 19
    • Replies: 43
    • ☆☆

    sir,in the 2nd question what should we take as capital investment, 600000 or 100000?

    February 27, 2015 at 9:11 am #230592
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Farzana: Please do not answer questions in the Ask the Tutor Forum – you are not the tutor (and your answer is not correct).

    The interest is 8% x 1000000 = 80,000
    So the profit before interest and tax is 220,000 + 80,000 = 300,000
    So the ROCE = 300,000 / (3,150,000 + 1,000,000) = 7.23%

    February 27, 2015 at 9:13 am #230593
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Second question: How on earth can the capital investment be 100,000?

    It is 700,000.

    So the RI is 80,000 – (8% x 700,000) = 24,000

    February 27, 2015 at 9:50 am #230610
    Farzana sultana
    Member
    • Topics: 19
    • Replies: 43
    • ☆☆

    if we r taking profit before interest then y r we adding the interest? before tax and interest means without tax n interest.m i wrong?

    and y we multiply the interest with loan only y not with equity as well?
    and sorry sir.next time i wont reply here.

    February 27, 2015 at 12:07 pm #230636
    rukhsarhussainch
    Member
    • Topics: 6
    • Replies: 15
    • ☆

    Awww confusing any way i pass my f2 today with 69%
    …
    Thanksssss open tution n All

    February 27, 2015 at 1:02 pm #230645
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Farzana: the question gives the profit before tax. For ROCE we need the profit before interest and tax, so we need to add the interest.
    Interest is only payable on loans – we do not pay interest on equity!!!!

    Rukhsar Hussein: That is great news that you passed. Many congratulations 🙂

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