I have this questions in my ACCA F2 practice and revision book, that I do not understand at all. There is no explanation in results either.
Could you please spare a minute and explain....
1. A division has a capital of $2000000 and earns an operating profit of $600000. It is considering a project that will increase operating profit by $20000, but would increase its capital employed by $80000. A rate of 15% is used to compute interest on capital employed.
What will be the effect on residual income and return on capital employed if division accepts the project?
Answer is - Residual income Increase, Return on investment Decrease
What are the calculations behind this?
Thank you for your help
-- Edited by BJA on Thursday 1st of March 2012 03:52:36 PM
the book really should be telling you how to do these as they are quite important to your studies related to divisional performance appraisal.
Are you using BPP or Kaplan? Personally I always use Kaplan now as despite some silly typo's they do at least give examples for everything.
Right, back to the question, two scenearios with Return on Investment verses Residual income then current vs Acid test.
I've put some notes at the side which I hope helps your understanding rather than hinders :
Note on the second one I forgot to add a note and I can't be bothered going back through MS Paint again. 1.8 is 10% less than 2.0 and 1.4 is 20% less than 1.75.
HTH,
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I have gradually realised, that it will be better to use Kaplan. I have been finding few problems with the BPP materials - missing text and incomplete examples - which is misleading for a student, especially if you are new to the subject and not sure if it is you going mad or what .....
You have saved me. I just could not be believe it was not explained in the Answers section and in the study text there was nothing similar that I could relate it too.
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