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Sorry for such a silly question at the very last minute – to calculate ROI or RI do we deduct depreciation from earnings? My understanding is we do, but answers to a couple of questions on the ACCA study hub are massively confusing, so wanted to confirm, please. Many thanks
When calculating ROI (Return on Investment) or RI (Residual Income), the treatment of depreciation depends on the specific context and instructions given in the question.
In some cases, depreciation may be deducted from earnings, while in other cases it may not be deducted.
For ROI calculations, if the question specifies that the profit figure provided is already after charging depreciation, then depreciation does not need to be deducted again.
However, if the profit figure is given before depreciation, then depreciation should be deducted from earnings before calculating ROI.
For RI calculations, depreciation is generally not deducted from capital employed. Instead, the focus is on the profit figure before depreciation.
The RI is calculated by subtracting a required rate of return (usually based on the cost of capital) from the profit before depreciation.
It is important to carefully read and understand the specific instructions and context of the question to determine whether depreciation should be deducted from earnings when calculating ROI or RI.
thank you for your quick response and the clarification, much appreciated. Regards
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