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PERFORMANCE MEASUREMENT-RESIDUAL INCOME

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › PERFORMANCE MEASUREMENT-RESIDUAL INCOME

  • This topic has 3 replies, 2 voices, and was last updated 8 months ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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    Posts
  • May 17, 2022 at 12:55 pm #655884
    Eunice03
    Participant
    • Topics: 69
    • Replies: 61
    • ☆☆

    A division is considering investing in capital equipment costing $2.7 million. The useful economic life of the equipment is expected to b 50yrs,with no resale value at the end of the period. The forecast ROI is 15% per annum before depreciation. The division’s cost of capital is 7%?

    The answer was
    Divisional profit before depreciation=2.7m x 15%=$405,000 per year
    Less depreciation=$2.7m x1/50=$54,000 per year
    Divisional profit after depreciation=$351,000
    Imputed interest=$2.7m x 7%=$189,000
    Residual income= $162,000

    Good day sir,Pls I don’t understand why they used the capital equipment value without depreciation to calculate the imputed interest.

    May 17, 2022 at 4:58 pm #655905
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51555
    • ☆☆☆☆☆

    The forecast divisional profit has been calculated after depreciation.

    The imputed interest is calculated on the amount that they are considering investing, which is $2.7M.

    May 18, 2022 at 8:49 pm #655998
    Eunice03
    Participant
    • Topics: 69
    • Replies: 61
    • ☆☆

    Thank you sir

    May 19, 2022 at 7:45 am #656010
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51555
    • ☆☆☆☆☆

    You are welcome.

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    Posts
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