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Question from BPP KIT
Operating profit before depreciation $85000
Depreciation $20000
Net current assets at beggining of year
$30000
Carrying value of non current assets at beginning of year $180000The centre manager is considering whether to sell a machine that is included in these forecast. The machine would add $2500 to divisional profit next year after depreciation of $500 . It has carrying value of $6000 and could b sold for this amount. He would use the proceeds from the sale plus additional cash from head office to purchase new machine $15000. This new machine would add $5200 to divisional profit next year after depreciation of $2000. What will be the expected ROI for division next year assuming that the manager acquires new machine n that non current assets are valued at the start of year carrying amount for the purpose of the ROI calculation.
A.30.9%
I really dont understand the questionThe current profit after depreciation is 85,000 – 20,000 = 65,000
The new profit will be 2,500 lower because of selling the old machine, and will be 5,200 higher because of the new machine, so a total of 67,700.The current value of the assets at the start of the year is 180,000 + 30,000 = 210,000
The sale of the machine will reduce this by 6,000 and the new machine will increase it by 15,000. So a new total of 219,000.
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