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Evening,
I had a slight problem looking at a ROCE question under investment appraisal specifically with the after depreciation profits.
So project X has a capital cost of 80000 and project y has cost of 150000
Project X profits year 1 is 50000 year 2 is 50000 year 3 30000 year 4 20000 year 5 100000.
Project y profits year 1 50000 year 2 50000 year 3, 4 and 5 60000 each
I calculated the average investment to be 40000 and 75000 respectively . How do I find the profits after depreciation.
I initially did 1/5yrs =20% and multiplied it by the costs of the respective projects which gave me 16000 and 30000 and deducted it from each years profits but I am not getting the correct profits.Slight addition how do we know we are starting our cashflow in year 0. Is that a general rule because we assume it is paid at the end of the previous period
If the question is exactly as you have typed it, then the profits (by definition) will already be after depreciation. So add them up and divide by 5 to get the average profit.
If, on the other hand, the question says that these are the profits before depreciation (or says that these are the net cash flows), then calculate the average profit before depreciation (as above) and then subtract the depreciation (which is as you have calculated, unless there is mention of any sale proceeds at the end of the 5 years).
As far as your second question is concerned, there is no such thing as year 0, year 1, etc.. They are points in time that are 1 year apart.
Time 0 is ‘now’ – the start of the first year.
Time 1 is one year from now – the end of the first year / start of the second year
Time 2 is two years from now – the end of the second year / start of the third yearand so on.
I do suggest that you watch my free lectures where all the above is explained. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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