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Divisional performance measurement

This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

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June 12, 2021 at 9:00 am #624916
xyzc
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The divisional manager wants to increase the return on investment for the next period.

Which two of the following options would increase the return on investment?

Increase payables
reduce interest payments
Accept all projects with a positive net present value
keep old machinery

I thought the answer should be reduce interest payments, and keep old machinery, but it is incorrect. I don’t understand why.
June 12, 2021 at 3:33 pm #625095
John Moffat
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Keeping old machinery will not change the ROI because the asset and the profit will stay the same.
Selling rather than keeping it is likely to increase the ROI because since it is old it is likely to be generating a low return.

The ROI of a division is calculated on the operating profit. Divisions do not pay interest because the finance comes from the head office.
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