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an investment division earns a return on investment of 15% and a
residual income of $200000
cost of capital is 18%.
a new project gives a ROCE 16%if the new project is accepted, what will happen on investment
division ROI and residual income?kindly explain this.. and please if u have anything.. link or sheet
related to this topic mail me ..thank youand please check this if i’m right..
a company has capital employed of $500000..
cost of capital 15% per year
ROI 17% per year…RI would be=85000-75000=10000 positive
workings:
charge on investment ;500000*15%=75000
income or profit ; 500000*17%=85000There is a chapter on divisional performance measurement in our Course Notes (which you can download free) and a lecture to go with the chapter (which you can watch free).
For your first example, since the new project gives a return of 16% which is higher than the current ROI of 15%, the ROI will increase.
However, since the return from the project of 16% is less than the cost of capital of 18%, the RI will decrease.Your second calculation is correct.
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