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The answer for this question is ROI decrease and RI increase.
An investment centre earns a return on investment of 18% and a residual income of $300,000. The cost of capital is 15%. A new project offers a return on capital employed of 17%.
Required
If the new project were adopted, what would happen to the investment centre’s return on investment and residual income?But if I’m not able to understand why. If ROI decrease it may be due to increasing Capital employed. The higher the capital employed the higher will be the interest on capital making residual income decrease not increase
The new project will increase the capital employed, but it will also give more profit (at 17% of the extra capital).
However since the existing return is 18%, taking a new project that only gives a return of 17% will reduce the overall return to the company.
As far as the RI is concerned, given that the new investment is giving a return of 17% and the cost of capital is 15%, the new investment will give extra RI and so the overall RI of the company will increase.
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thank you very much for responding to my query. It’s clearer now.
Yes I will search for the lectures and watch it. Thank you Sir.
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