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ROI and RI

CChris5y ago
I don’t get this question sir, We where given RI as $620,000 Profit before interest $1,460,000 Cost of capital 12% Calculate the ROI using this information below I know ROI = profit / capital employed * 100% Do I have to use 620,000 as the capital employed sir?
John MoffatJohn MoffatTutor5y ago#1
No! $620,000 is the residual income, not the capital employed !!! The residual income is the profit before the notional interest less the notional interest, so you can calculate the amount of the interest. You know the interest rate 12%, so you can then calculate the capital employed. When you know the capital employed you can calculate the ROI.
CChris5y ago#2
Yes RI = profit less notional interest * investment. ROI = controllable profit/CE * 100%. 620,000 = 1460000 * 12% ( CE) will this equation be correct to get CE(capital employed)?
CChris5y ago#3
sorry i meant 1460000+ 620000 = 12% CE 840,000/ 12% = CE CE = $7,000,000 ROI = 1460000/ 7,000,000 * 100% = 20.8% Will this be correct sir?
John MoffatJohn MoffatTutor5y ago#4
That is correct (except that I get it to be 20.857%, which is 20.9% to 1 decimal place) :-)
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