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Chapter 2

Question 2

ROCE

A project requires an initial investment of $1,000,000 and then earns net cash
inflows as follows:

Year 1 2 3 4 5 6

Cash inflows ($000) 400 250 200 175 75 50

In addition, at the end of the six year project the assets initially purchased will
be sold for $200,000.

Determine the projects’ average ROCE

Average annual profit:

(Total annual cash flows – total depreciation)/project life

(400 + 250 + 200 + 150 + 100 + 50 – (1,000 – 200))/6 = $58,333 per annum

Average capital investment:

(1,000 + 200)/2 = 600

Average ROCE = $58,333/$600,000 × 100 = 9.7%

Illustrations and further practice

Now try TYU questions 1 and 2 from Chapter 2

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