ROI

For the question below and for any questions involving calculation of ROI, I dont understand how do we deal with depreciation in coming up to the ROI? Must it or must it not be subtracted from the capital employed? Why some questions include and some questions exclude depreciation? The whole concept of it confuses me. Hope you can help me out with this. Thank you sir

Q239 (BPP REVISION KIT)
At the beginning of 20X2, a division has capital employed, consisting of NCAs of $2 million (at NBV) and working capital of $0.2 million. These are expected to earn a profit in 20X2 of $0.5 million, after depreciation of $0.4 million. A new machine will be installed at the beginning of 20X2. It will cost $0.8 million and will require an additional $0.1 million in working capital. It will add $0.35 million to divisional profits before deducting depreciation. This machine will have a 4 year life and no residual value: depreciation is by the straight line method. When calculating ROI, capital employed is taken at its mid year value.

What is the expected ROI of the division in 20X2?
A. 21.7%
B. 23.2%
C. 24.1%
D. 26%

Answer: B – 23.2%

The correct answer is 23.3%.
Capital employed at the start of 20X2 = $2 million + $0.2 million + $0.8 million + $0.1 million = $3.1 million

Capital employed at the end of 20X2 is the capital employed at the beginning of the year minus depreciation of $0.4 million on the ‘old asset’ and $0.2 million on the ‘new asset’.

Capital employed at the end of 20X2 = $1.6 million + $0.2 million + $0.6 million + $0.1 million = $2.5 million

Mid year capital employed = $(3.1 m + 2.5m) / 2 = $2.8 m

Profit = $0.5 m + $0.35 m – depreciation $0.2 m = $0.65 m

ROI = 0.65 / 2.8 = 0.232 = 23.2%