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At the end of 20X1, an investment centre has net assets of $1m and annual operating profits of $190,000. However, the bookkeeper forgot to account for the following:
A machine with a net book value of $40,000 was sold at the start of the year for $50,000 and replaced with a machine costing $250,000. 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.
Assuming no other changes to profit or net assets, what is the return on investment (ROI) for the year?
There is no point in just setting a question like this and expecting an answer!
You must have an answer in the same book in which you found the question, and you should ask whatever it is in the answer that you are not clear about. Then I will help you.
(Have you watched my free lectures on ROI?)
Ok my apologies got the question from the sept16 cbe and the answer is 19.8% I have no idea how they got that m getting answers in the range of 15%
The net assets at the start are $1M. The sale of the asset means that non-current assets fall by 40,000 and cash increases by 50,000.
The purchase of the asset means that non-current assets increase by 250,000 and cash falls by 250,000.Therefore the net assets at the end of the year ate $1M – 40,000 + 50,000 + 250,000 – 250,000 = $1,010,000
The profit for the year is 190,000 + 10,000 (the profit on sale of the asset) = 200,000
Therefore the ROI = 200/1010 = 19.8%
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