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A divisional manager is evaluated by the head office using RI and therefore uses RI to
appraise projects.
Company cost of capital = 10%
New project details: Investment $600,000
3-year life
No residual value
Annual cash inflow $500,000.Y1 Y2 Y3
Cash flow 500 500 500
Depreciation (200) (200) (200)
Profit 300 300 300
NBV 600 400 200
Imputed interest 60 40 20
Profit ? interest = residual income 240 260 280Why the NBV for Y1 is 600 but not 400?
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