CIMA Exam CIMAPRO19-P03-1 Topic 7 Question 53 Discussion

Actual exam question for CIMA's CIMAPRO19-P03-1 exam

Question #: 53
Topic #: 7

Division A of X plc produced the following results in the last financial year.

Net profit $200,000 Gross capital employed$1,000,000

For evaluation purposes all divisional assets are valued at original cost.

The division is considering a project that has a positive NPV, will increase annual net profit by $15,000, but will require average inventory levels to increase by $50,000 and non-current assets to increase by $50,000.

Xplc imposes a 16% capital charge on its divisions. Given these circumstances, will the evaluation criteria of return on investment (ROI) and residual income (RI) motivate divisionAmanagers to accept the project?

AROI Yes RI Yes

BROI Yes RI No

CROI No RI Yes

DROI No RI No

Show Suggested Answer

Suggested Answer: B, C

by Margart at Aug 09, 2023, 10:06 PM

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Tambra

3 days ago

This is a classic case of the trade-off between ROI and RI. The project has a positive NPV, so it should be accepted, but the increased capital employed might make it look less attractive from the ROI perspective.

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