Page 134 - APM Integrated Workbook STUDENT S18-J19

Chapter 9

RI

4.1 Calculation

$
Controllable operating profit X

Less: imputed interest (controllable capital employed × cost of capital) (X)
–––

RI X
–––

Decision rule: Accept project or assess the division as performing favourably if RI is
positive.

4.2 RI evaluation

Advantages Disadvantages

 Reduces problems of ROI, i.e.  Can still result in dysfunctional
dysfunctional behaviour and behaviour (EVA is a superior
holding onto old assets. measure).

 Easy decision rule.  Absolute figure so does not
facilitate comparisons.
 Makes divisional managers
more aware of cost of finance.  Difficult to determine
appropriate cost of capital.
 Different cost of capitals can be
applied to divisions with  Different accounting policies
different risk profiles. can confuse comparison.

 May encourage manipulation of
profit or capital employed
figures.

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