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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,
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 = 1,137,500Therefore the residual income = 1,137,500 – (10% x $6.5M) = 487,500
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,
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