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An investment centre has prepared the following forecast for the next financial year.
Operating profit before depreciation $85000
Depreciation $20000
Net current asset at beginning of the year $30000
Carrying value of non current asset at beginning of year $180000
The centre manager is now 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 be sold for this amount. They would use the proceed from the sale plus additional cash from head office to purchase a new machine for $15000. This new machine would add $5200 to divisional profit next year after depreciation 2000.
What will be the ROI for the division next year assuming that the manager acquire the new machine and that NCA are valued at the start of the year carrying amount for the purpose of ROI calculation?
Why do we need to deduct the profit of 2500 and the carrying value of 6000?If they buy the new machine then the question says that they will be selling the old machine.
The forecasts for the next financial year will be including the machine that they are selling. Therefore if they do buy the new machine they need to add on the new machine and remove the old machine from the forecast.
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