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ROI and RI

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › ROI and RI

  • This topic has 4 replies, 2 voices, and was last updated 2 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • December 9, 2020 at 1:54 pm #598824
    iyamu
    Member
    • Topics: 275
    • Replies: 167
    • ☆☆☆

    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?

    December 9, 2020 at 2:52 pm #598839
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    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.

    December 12, 2020 at 11:33 am #599673
    iyamu
    Member
    • Topics: 275
    • Replies: 167
    • ☆☆☆

    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)?

    December 12, 2020 at 11:39 am #599677
    iyamu
    Member
    • Topics: 275
    • Replies: 167
    • ☆☆☆

    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?

    December 12, 2020 at 4:38 pm #599717
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    That is correct (except that I get it to be 20.857%, which is 20.9% to 1 decimal place) 🙂

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