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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%
How to find the capital employed at end sir?? For profit is it 0.35+0.5-0.4?The capital employed at the start of the year is 2 + 0.2 + 0.8 + 0.1 = 3.1M.
The capital employed at the end of the year is 3.1 – 0.4 – 0.2 = 2.5M
The question asks for the mid-year value, which is therefore the average of the two.
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