Hi,
Can I please double check my understanding is correct when calculating ROCE under the average investment method. I believe you need to calculate the following:
Step 1 Net CF - Depreciation - Scrap Value = A
No of Years
Step 2 Cost + SV = B
2
Step 3 A divided by B
Also for the Net CF value in step 1, I believe we need to consider the investment in year 0, is this correct?
Thanks
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ROCE (Average Investment Method)
10y ago#1Not quite.
To get the average profit p.a. you taking the total profit before depreciation (which is equal to the cash flows) less the total depreciation (so as to get the total profit after depreciation) and then divide by the number of years.
To get the average investment, you add the initial investment to any scrap value, and divide by 2.
The ARR is the average profit as a % of the average investment.
(I do suggest you watch the free lecture on this. Our lectures are a complete course covering everything you need to be able to pass F9 well.)
Thanks for clarification.
I did watch the lectures but after doing some of the BPP revision questions I got a little confused.
So to double check it'll be:
The average profit will be: Profit before depreciation - (investment / no years) x no years) - Scrap Value) divided by number of years.
The average investment is investment + scrap value divided by 2
Then ARR is the average profit divided by average investment.
10y ago#3No - it is what I wrote before!!!
Average profit = (total profit before depreciation - total depreciation) / number of years.
Average investment is (investment + scrap value) /2
Thank you. Apologies for asking twice, I got confused from looking at the BPP notes then then the OpenTuition notes.
10y ago#5No problem (and I hope it now makes sense :-) )
What if scrap value is nill. will it still be Initial Investment +( 0 ) scrap value devided by 2.
8y ago#7Yes, of course :-)
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