ACCA PM · Chapter 14 · Question 3 of 10
Division D has capital employed of $4,000,000 and controllable profit of $640,000. The company's cost of capital is 12%. The divisional manager is considering a new project requiring investment of $500,000 and generating an annual controllable profit of $70,000. What would be the effect of accepting the project?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) ROI would fall to 15.8% but RI would increase by $10,000
Explanation
New ROI = ($640,000 + $70,000) / ($4,000,000 + $500,000) = 15.8%, lower than the current 16%. Change in RI = $70,000 - (12% x $500,000) = $10,000 increase. A manager judged on ROI might reject a project that earns more than the cost of capital, which is a weakness of ROI.
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