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Hi there,
It seems that Kaplan & BPP books contradict each other.
Kaplan’s book states that one of ROCE’s disadvantages is that
=> It takes no account of the project’s life (page 38, Chapter 2, book’s latest version)Where as BPP’s 2018 version of the book (found it on the internet) says that one of ROCE’s advantages is that
=> It looks at the entire project life (page 157, Chapter 7 – Investment Decisions).Which one’s the correct one?
I do not have the study tests (only the BPP Revision Kit) and so I can’t see exactly what they have written.
However, and this will seem strange, but both statements are true. The problem is that on their own they don’t mean much – they should have expanded the explanation.
On the one hand, the ROCE calculation does certainly look at the entire life of the project (as opposed to, for example, the payback period which ignores flows outside the payback period).
However, if ROCE is used to compare different investments, then it takes no account of the fact that one investment might generate returns over a much longer period than the other investment.Written questions on ROCE are rarely asked in Paper FM (because it was examined in Paper MA and FA (were F2 and F3), and because by far the most important technique is discounted cash flow, which is always examined a lot in the exam.
Thank you for the detailed answer!
This looks so much more clear to me now!
Definitely going to start watching the video lectures!
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