Mock Exam Q — OpenTuition Forums

ASalawi sayed10y ago

Hi Sir, A division is considering a capital investment of $6.5 M, The expected life of the investment is 40 years with no resale value at the end of the period, The forecast return on investment is 20% PA before depreciation .the division cost of capital is 10% What is the expected residual income of the initial investment I got $ 650000 But the correct answer is 487500 Thank you Very much,

John MoffatTutor10y ago#1

The profit will be 20% x $6.5M = $1,300,000 p.a. before depreciation. The depreciation will be $6.5M / 40 = 162,500 Therefore the profit after depreciation = 1,137,500 Therefore the residual income = 1,137,500 - (10% x $6.5M) = 487,500

ASalawi sayed10y ago#2

Thanks a lot, So we should always consider the profit after depreciation ,and does it mean that we should take the net profit, Thanks for help,

John MoffatTutor10y ago#3

Yes - always after depreciation (unless obviously specifically told otherwise, which is very unlikely).

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