ROI & RI

This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.

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April 30, 2017 at 9:15 am #384337
geokcheng
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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
April 30, 2017 at 10:02 am #384348
John Moffat
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The 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.

Have you watched my free lectures on this? The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
April 30, 2017 at 11:12 am #384357
geokcheng
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sir,

Why In this question we are using profit after tax, but the formula for RI is using PBIT?
May 1, 2017 at 7:00 am #384398
John Moffat
Keymaster
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Firstly, 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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