Division A of Aigburth Co is considering a project which will increase annual net profit after tax by
$30,000 but will require average inventory levels to increase by $200,000. The current target rate of
return on investments is 13% and the imputed interest cost of capital is 12%.
Based on the ROI and/or RI criteria would the project be accepted?
A ROI – yes, RI - no
B ROI – yes RI - yes
C ROI – no, RI - yes
D ROI – no, RI - no
I am unable to solve this. please help me sir
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Performance measurement
10y ago#1If average inventory levels (and therefore average net assets) increase by 200,000, the on ROI is will need to profit to increase by 13% x 200,000 = 26,000.
The profit increases by 30,000 so on ROI it will be accepted.
On RI, the RI will increase by 30,000 - (12% x 200,000) = 6,000.
So since there is an increase in the RI it should be accepted.
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