Hi Sir,
Could you explain to me the question below.
Division A of Aigburth Co is considering a project which will increase annual net profit after tax by $30,000 but will require average inventory levels to increase by $200,000. The current target rate of return on investments is 13% and the imputed interest cost of capital is 12%.
Based on the ROI and/or RI criteria would the project be accepted?
Answer : ROI – yes, RI – yes
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ROI & RI
9y ago#1The return on the investment is 30/200 = 15%, which is more than the target return.
The residual income is 30,000 - (12% x 200,000) = 6,000, which is positive.
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sir,
Why In this question we are using profit after tax, but the formula for RI is using PBIT?
9y ago#3Firstly, the question does not give a tax rate so it would be impossible to deal with it anyway.
Secondly, the question should not really have said 'after tax' because divisions do not pay tax (it is the company that pays tax).
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