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Return on Investment (ROI)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Return on Investment (ROI)

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by John Moffat.
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  • Author
    Posts
  • September 5, 2021 at 1:37 pm #634463
    nzrn89
    Participant
    • Topics: 37
    • Replies: 15
    • ☆☆

    EF Plc has 3 divisions – P, Q and R – whose performance is assessed on return on investment (ROI). The ROI for the divisions for the coming year is expected to be 24%, 28% and 23% respectively. Two new proposals are now being considered:
    (i) P is considering investing $75,000 in order to increase profit by $21,600 each year
    (ii) Q is considering selling a machine, forecast to earn a profit of $2,500 in the coming year, for its carrying value (NBV) of $7,000.

    Which of the following divisions will reject the proposal under consideration because of its effect on ROI?
    A. P
    B. Q
    C. P and Q
    D. Neither P and Q

    The answer is Q. Why will we reject Q?

    September 5, 2021 at 7:55 pm #634497
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54660
    • ☆☆☆☆☆

    The return on the asset being sold is 2,500/7,000 = 36%

    By selling it, the return of that division will be reduced to even less than the current 23%.

    The should be wanting to increase their ROE and not reduce it.

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