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?
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Return on Investment (ROI)
5y ago#1The 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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