- This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.
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- February 15, 2019 at 9:43 pm #505248
Could you please explain why in the following question the 2500 is being subtracted from profit figure.
An investment centre has prepared the following forecasts for the next financial year. $ Operating profit before depreciation 85,000 Depreciation 20,000 Net current assets at beginning of year 30,000 Carrying value of non-current assets at beginning of year 180,000 The centre manager is now considering whether to sell a machine that is included in these forecasts. The machine would add $2,500 to divisional profit next year after depreciation of $500. It has a carrying value of $6,000 and could be sold for this amount. He would use the proceeds from the sale plus additional cash from Head Office to purchase a new machine for $15,000. This new machine would add $5,200 to divisional profit next year after depreciation of $2,000. What will be the expected return on investment (ROI) for the division next year, assuming that the manager acquires the new machine and that non-current assets are valued at the start-of-year carrying amount for the purpose of the ROI calculation.
February 16, 2019 at 10:17 am #505286If they buy the new machine they will be selling an existing machine.
The machine that they are selling is giving a profit of $2,500 and that has been included in the profit forecasts. If they sell it, then the profits will fall by the $2,500.
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