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ROI Mock exam question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › ROI Mock exam question

  • This topic has 4 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • November 11, 2015 at 10:33 pm #281824
    gabbi08
    Member
    • Topics: 135
    • Replies: 181
    • ☆☆☆

    Dear Mr Moffat,

    I have difficult to answer the following question. Could you please show the working?

    At the start of the year a division has a non current asset of $6M and made not additional or disposal during the year. Depreciation is charged at 10% on not all current assets. Working capital is 0.75M at the start of the year and expected to increase by 20% at the end of the year. The budgeted profit of the year is 1.8M.
    What is the expected ROI for the division.

    Correct answer 27.59%

    Thanks

    Gabriella

    November 12, 2015 at 6:34 am #281861
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51571
    • ☆☆☆☆☆

    ROI = profit / capital employed

    The question specifically asked you to use the average capital employed.
    Capital employed at the start of the year = 6 + 0.75 = 6.75
    Capital employed at the end of the year = (6 – (10% x 6)) + (0.75 + 20%) = 6.3

    Average capital employed = (6.75 + 6.3) / 2 = 6.525

    ROI = 1.8 / 6.525 = 27.59%

    November 21, 2015 at 10:35 am #284293
    gabbi08
    Member
    • Topics: 135
    • Replies: 181
    • ☆☆☆

    Sorry, for late reply.
    Thanks a lot for your help

    Gabriella

    November 21, 2015 at 11:16 am #284300
    gabbi08
    Member
    • Topics: 135
    • Replies: 181
    • ☆☆☆

    Dear Mr Moffat,

    I do have another question regarding ROI/RI which I would appreciate your help.

    A company has a divisional structure. Division Y in the period just ended achieved Return on Investment (ROI) of 20%. If capital employed was $ 4million, of which 25% was working capital and the remanider consisted of non current assests at the net book value. The depreciation charge for the year was $300.000.

    What was the residual income earned by Division Y in the period?

    Answer $440,000.

    Profit (4*20/100) 800,000
    National
    Interest
    (9*4M) 360.000
    RI 440.000

    Why wan’t the depreciation included into the calculation?
    Thanks

    Gabriella

    November 21, 2015 at 1:59 pm #284317
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51571
    • ☆☆☆☆☆

    The ROI is profit as a % of the investment, and depreciation will already have been charged as an expense in arriving at the profit.

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