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- October 6, 2017 at 10:55 pm #409708
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?1. Could you explain what how to calculate capital employed is taken? (The working in the kit is bit difficult to understand)
October 7, 2017 at 7:57 am #409733Capital employed at start of year = 2 + 0.2 + 0.8 + 0.1 = 3.1M
Cap employed at the end is 3.1M less depreciation of 0.4 + 0.2 = 0.6M, so is 2.5M
So cap employed mid year is (3.1 + 2.5) / 2 = 2.8M
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