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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
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%) = 6.3Average capital employed = (6.75 + 6.3) / 2 = 6.525
ROI = 1.8 / 6.525 = 27.59%
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 440.000Why wan’t the depreciation included into the calculation?
ThanksGabriella
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