Page 428 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 16

Test your understanding 8

Division M has produced the following results in the last financial year:

$000

Net profit 360
Capital employed: 1,600

100

For evaluation purposes all divisional assets are valued at original cost. The
division is considering a project which will increase annual net profit by
$25,000, but will require capital employed to increase by $130,000. There is
an 18% capital charge on investments.

Given these circumstances, will the evaluation criteria of Return on
Investment (ROI) and Residual Income (RI) motivate Division M management
to accept this project?

ROI RI

A Yes Yes

B Yes No

C No Yes

D No No

Illustrations and further practice

Now try TYU questions 3, 4 and 5 from Chapter 16

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