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Mock Exam Q

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Mock Exam Q

  • This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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    Posts
  • November 29, 2015 at 6:59 am #286049
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    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,

    November 29, 2015 at 8:29 am #286073
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    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

    November 29, 2015 at 12:08 pm #286122
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    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,

    November 29, 2015 at 2:10 pm #286135
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

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

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