NUMERICAL – ANANYA Ltd. (2004)
Exhibit 2
We know that formula for Return on Investment is:
ROI = NET PROFIT / INVESTMENT
Now,
Investment = Fixed assets + Net working Capital
(We assume Current Assets as the Net Working Capital as there are no Current Liabilities given in the question)
Therefore, Investment for:
M = 0 + 200
= 200P = 200 + 1000
= 1200C = 200 + 500
= 700 Now,
Net Profit for M, P and C:
Therefore,
ROI for:
M = 200
= 100 %
200
P = 200
= 16.67 %
1200
C = 200
= 28.57 %
700
Since there are no fixed assets in marketing division, the ROI is higher, but the operating expenses are much higher for these division.
Hence, any further increase in op exp is likely to drag the ROI down
Since the asset is depreciated for10 years as per SLM method, the depreciation rate is 10 %.
So going ahead if the operating expenses for div P & C remains at the same level, reduction in the value of an asset due to depreciation is likely to have a positive impact on ROI.
Even the rate of increase in ROI for Div P would be higher since the asset of a higher value is depreciated than the Div C.
ROI for:
M = 200
= 100 %
200
P = 200
= 16.67 %
1200
C = 200
= 28.57 %
700
Since there are no fixed assets in marketing division, the ROI is higher, but the operating expenses are much higher for these division.
Hence, any further increase in op exp is likely to drag the ROI down
Since the asset is depreciated for10 years as per SLM method, the depreciation rate is 10 %.
So going ahead if the operating expenses for div P & C remains at the same level, reduction in the value of an asset due to depreciation is likely to have a positive impact on ROI.
Even the rate of increase in ROI for Div P would be higher since the asset of a higher value is depreciated than the Div C.