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- This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
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- November 3, 2020 at 10:02 am #593917
Hi john
i would like to ask you a question about ROCE/ARR
HERE IS THE QUESTION
A company undertakes a project that involves purchasing machinery at a cost of $65,000. The machinery is used on the project for five years, generating operating cash inflows of $20,000 per year. It is sold at the end of the project for $10,000. Taxation is charged at a rate of 30%. Calculate the initial return on capital employed (ROCE) for the project, to the nearest whole percentage
HERE IS THE KIT ANSWER
Initial ROCE = average annual profits before interest and tax / initial capital × 100 Profits = operating cash flows before taxation – depreciation Depreciation over project life = $65,000 – $10,000 = $55,000 Depreciation per annum = $55,000 / 4 = $13,750 Average annual profits = $20,000 – $13,750 = $6,250 per annum Initial ROCE = $6,250 / $65,000 × 100 = 9.6% or 10% to nearest whole percentage.
MY ISSUE.
when finding average (per year) depreciation he has used 4 years instead of using 5 year project life. can u help me understand why 4 years and not 5 years.thanks in advance
November 3, 2020 at 10:31 am #593931Assuming that you have copied the question correctly, then it should be divided by 5.
November 3, 2020 at 11:24 am #593935I have copied it correctly.
thanks john for your support.
November 3, 2020 at 3:24 pm #593959You are welcome 🙂
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