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At the beginning of 20×2 a division has capital employed, consisting of non-current assets of $2 mill (at netbook value) and working capital of $0.2 mill. These are expected to earn a profit in 20×2 of $0.5million after depreciation of $0.4 million. A new machine will be installed at the beginning of 20×2. It will cost $0.8million 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 four-year life and no residual value: depreciation is by straight-line method. When calculating ROI, capital employed is taken at its mid-year value.
I know ROI= Profit/Investment however while the lecture did give brief notes on depreciation and ROI the lecture examples we did, didn’t show how one could tackle such a question.
Please help sir especially the part with capital employed is taken at its mid-year value. I did watch the lectures and lecture notes.
For the mid-year capital employed, you need to calculate the capital employed at the start of the year and the capital employed at the end of the year. Add them together and divide the total by 2 to get the mid-year value.
You will know from earlier exams that the capital employed is always equal to the non-current assets plus the net current assets (the working capital).
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