RI

This topic has 4 replies, 2 voices, and was last updated 5 years ago by John Moffat.

Viewing 5 posts - 1 through 5 (of 5 total)

Author

Posts
September 10, 2020 at 1:09 pm #584696
Noah098
Member
- Topics: 935
- Replies: 352
A division is considering investing in capital equipment costing $2·7m. The useful economic life of the equipment is
expected to be 50 years, with no resale value at the end of the period. The forecast return on the initial investment
is 15% per annum before depreciation. The division’s cost of capital is 7%.
What is the expected annual residual income of the initial investment?
A $0
B ($270,000)
C $162,000
D $216,000
September 10, 2020 at 1:16 pm #584708
Noah098
Member
- Topics: 935
- Replies: 352
i think the answer is D, but i do not have its answer. Could you please confirm my answer sir?
September 10, 2020 at 4:05 pm #584805
John Moffat
Keymaster
- Topics: 57
- Replies: 54858
The answer is C. I think maybe you forgot to subtract depreciation from the annual return.
September 10, 2020 at 6:53 pm #584864
Noah098
Member
- Topics: 935
- Replies: 352
sir if we are deducting depreciation from profit then why not deduct deprn from 2.7$ of investment also(basically why not use NBV)?
September 11, 2020 at 11:46 am #584963
John Moffat
Keymaster
- Topics: 57
- Replies: 54858
The question gives the return before depreciation. The profit we use is always after depreciation.

The question specifically says to calculate the RI on the initial investment.
Author

Posts

Viewing 5 posts - 1 through 5 (of 5 total)

You must be logged in to reply to this topic.