Page 449 - F2 - MA Integrated Workbook STUDENT 2018-19

Performance measurement techniques

Test your understanding 7

B

Original profit = £2,000,000  12% = £240,000

New profit = £240,000 + £90,000 = £330,000
New capital employed = £2,000,000 + £500,000 = £2,500,000

Residual income = £330,000 – (10%  £2,500,000) = £80,000

Test your understanding 8

C

ROI before project = 360/1,600 = 22.5%

ROI after project = 385/(1,600 + 130) = 22.3%
Therefore management would reject this project, if ROI is used as an
evaluation criterion.

Residual value before project = 360 – (1,600 × 0.18) = $72,000

Residual value after project = 385 – (1,730 × 0.18) = $73,600
Therefore management would accept this project if residual income is used as
an evaluation criterion.

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