Hi, I need some help with the below question which was in the June 2012 exam paper.
“An investment centre earns a ROI of 18% and a residual income (RI) of £300,000. The cost of capital is 15%. A new project offers a return on capital employed 17%.
If the new project were adopted, what would happen to the investment centre’s return on investment and RI?
Return on Investment: Increase or Decrease?
Residual Income: Increase or Decrease?”
The answer is ROI Decreases and RI increases but i am having trouble understanding how.
It is my knowledge that Return of Capital Employed is the same as Return of Investment so 17%-18% = -1% so ROI decreases.
But having great difficulty understanding how RI increases.
Thanks
Ask the Tutor ACCA MA
Residual Income and Return of Investment
You have asked this in two places - please do not do that.
I have answered your question in the other forum.
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