Required Calculate ROI for each of the five years and comment on the results ACTIVITY 3 Required: Calculate ROI for each investment centre and comment on the results The arguments for using net book values for calculating ROI (a) It is the method of calculating ROI. 'normally accepted' (b) Organisations are continually buying new non-current assets to replace old ones that wear out, and so on the whole, the total net book value of all non-current assets together will remain fairly constant (assuming nil inflation and nil growth). 2. Profit/gross capital employed (gross assets employed) Gross capital employed=non-current assets (before depreciation)+working capital ACTIVITY 4 If a company acquired a non-current asset costing $40,000, which it intends to depreciate by $10,000 p.a for 4 years, and if the asset earns a profit of $8,000 p.a after depreciation, Calculate for each of the four years, ROI based on; (i)net book values (ii)gross values (iii)Comment on the results 3. Constituent elements of the investment base Although we have looked at how the investment base should be valued, we need to consider its appropriate constituent elements. (a) If a manager's performance is being evaluated, only those assets which can be traced directly to the division and are controllable by the manager should be included. Head office assets or investment centre assets controlled by head office should not be included. So, for example, only those cash balances actually maintained within an investment centre itself should be included. (b) If it is the performance of the investment centre that is being appraised, a proportion of the investment in head office assets would need to be included because an investment centre could not operate without the support of head office assets and administrative backup. 4. Profits We have looked at how to define the asset base used in the calculations but what about profit? If the performance of the investment centre manager is being assessed it should seem reasonable to and base profit on the revenues and costs controllable by the manager exclude service and head office costs except those costs specifically attributable to the investment centre.
Required Calculate ROI for each of the five years and comment on the results ACTIVITY 3 Required: Calculate ROI for each investment centre and comment on the results The arguments for using net book values for calculating ROI (a) It is the 'normally accepted' method of calculating ROI. (b) Organisations are continually buying new non-current assets to replace old ones that wear out, and so on the whole, the total net book value of all non-current assets together will remain fairly constant (assuming nil inflation and nil growth). 2. Profit/gross capital employed (gross assets employed) Gross capital employed=non-current assets (before depreciation)+working capital ACTIVITY 4 If a company acquired a non-current asset costing $40,000, which it intends to depreciate by $10,000 p.a for 4 years, and if the asset earns a profit of $8,000 p.a after depreciation, Calculate for each of the four years, ROI based on; (i)net book values (ii)gross values (iii)Comment on the results 3. Constituent elements of the investment base Although we have looked at how the investment base should be valued, we need to consider its appropriate constituent elements. (a) If a manager's performance is being evaluated, only those assets which can be traced directly to the division and are controllable by the manager should be included. Head office assets or investment centre assets controlled by head office should not be included. So, for example, only those cash balances actually maintained within an investment centre itself should be included. (b) If it is the performance of the investment centre that is being appraised, a proportion of the investment in head office assets would need to be included because an investment centre could not operate without the support of head office assets and administrative backup. 4. Profits We have looked at how to define the asset base used in the calculations but what about profit? If the performance of the investment centre manager is being assessed it should seem reasonable to base profit on the revenues and costs controllable by the manager and exclude service and head office costs except those costs specifically attributable to the investment centre.
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