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Good afternoon. I know we have to deduct notional interest on amount invested when calculating RI. In a question from the Kaplan kit, they have given us the cost of capital % as well as the CURRENT return on investment %, and I proceeded to use the latter which was wrong. I know this might be silly but It would be great if you could enlighten me on this topic.
You should use the cost of capital percentage provided, not the current return on investment percentage.
The notional interest is calculated by applying the cost of capital to the amount invested. This notional interest is then deducted from the profit to determine the RI. The current return on investment percentage is not used in this calculation.
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