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ROCE F9 FINANCIAL MANAGEMENT

Forums › ACCA Forums › General ACCA Forums › ROCE F9 FINANCIAL MANAGEMENT

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by Kim Smith.
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  • April 25, 2021 at 5:38 pm #618832
    Jayxymak
    Participant
    • Topics: 1
    • Replies: 0
    • ☆

    Hi, I’ve come across the below question from the BPP revision kit, and confused about how the ROCE is calculated. I thought ROCE is calculated as Profit/average investment which should be $1200/($9000/2).

    A project has average estimated cash flows of $3,000 per year with an initial investment of $9,000.
    Depreciation is straight-line with no residual value and the project has a five-year life span. The
    company has a target return on capital employed (ROCE) of 15% and a target payback period of 2.5 years. ROCE is based on initial investment.
    Under which investment appraisal method(s), using the company’s targets, will the project
    be accepted?
    (1) ROCE
    (2) Payback basis
    A 1 only
    B 2 only
    C Both 1 and 2
    D Neither 1 nor 2
    The correct answer is D
    The ROCE calculation is as follows
    Depreciation per year = $9,000/5 years = $1,800
    Profit per year = $3,000 – $1,800 = $1,200
    ROCE = Profit/Initial investment = $1,200/$9,000 = 13.33%

    Please if you could clarify, that would be great.

    Jay

    April 25, 2021 at 6:31 pm #618833
    Kim Smith
    Keymaster
    • Topics: 134
    • Replies: 8304
    • ☆☆☆☆☆

    You need to post to the FM forum – this general forum is for non-exam=specific general queries.

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