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Could you please explain how to calculate RI after proposed investment in the following question.
Question:
Box Co has an operating profit of $20,000, and operating assets of $95,000. The cost of capital is 12%. There is a
proposed investment of $10,000 which will increase the operating profit by $1,400.
calculate the RI with and without the proposed investment.The correct answers are: Before investment: $8,600, After investment $7,950.
Before investment after investment
$ $Divisional profit 20,000 21,400
Depreciation (850)
Imputed interest (12% of $95,000) (11,400)
Imputed interest (12% of $105,000) (12,600)
Residual income 8,600 7,950Be honest – have you actually watched my free lectures on this?
I ask because this reallyiq very basic calculating of the residual income. You have the workings in your answer and you really cannot expect me to type out all of my lectures here 🙂
However, you have either not copied the question or answer in full, or there is a mistake in your book.
The residual income before the investment is correct at $8,600. The residual income with the investment is 21,400 less 12,600, which is $8,800.
(The answer that you have copied out has also charged depreciation of $850. However this is only relevant if the question had specifically said something about depreciation – what you have typed does not 🙂 )yes I have watched you lectures, in the question there is no mention of the depreciation in any way which is why I was confused as to how the depreciation charge had been calculated. maybe there has been a misprint in my book.
thank you sir you clearing my doubt.
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