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Green division is one of many divisions in Colour plc. At its year-end, the fixed
assets invested in Green were £30 million, and the net current assets were
£5 million. Included in this total was a new item of plant that was delivered three
days before the year end. This item cost £4 million and had been paid for by
Colour, which had increased the amount of long term debt owed by Green by this
amount.
The profit earned in the year by Green was £6 million before the deduction of
£1?4 million of interest payable to Colour.
What is the most appropriate measure of ROI for the Green division?
A 13?1%
B 14?8%
C 17?1%
D 19?4%Sir I know the formula for ROI – Profit/ Capital employed. i.e 6m but I am unable how to get capital employed
The capital employed at the end of the year = 30 + 5 = 35M
However this includes the new plant which will not have been earning profits because it was bought at the end of the year, and therefore the capital employed to use is 35M – 4M = 31M.
Professor can you please tell why we are not taking PBT here? We take PBT in Investment centres for their performances measurement so why not here?
I have just noticed that the original question should not have been posted in this forum – it is not relevant for Paper FA.
We take the operating profit which is the profit before interest and tax. How much interest they are charged by Colour has nothing to do with how well (or not) the division is being managed.
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