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

Division A of X plc produced the following results in the last financial year.Net profit $200,000 Gross capital employed$1,000,000For 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?
B) ROI Yes RI No and C) ROI No RI Yes
A) ROI Yes RI Yes
D) ROI No RI No

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

Actual exam question for CIMA's CIMAPRO19-P03-1 exam
Question #: 53
Topic #: 7
[All CIMAPRO19-P03-1 Questions]

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?

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Suggested Answer: B, C

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

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Berry
10 months ago
Not sure if RI will be enough to motivate managers.
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Beckie
10 months ago
Totally agree, ROI is going to drop with those asset increases.
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Vi
10 months ago
Surprised that ROI is so affected by the capital charge!
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Sheron
10 months ago
I think RI will be a yes, though.
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Jaleesa
10 months ago
ROI will definitely be a no with that capital charge.
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Latrice
11 months ago
Based on what we practiced, I think ROI might be a no, but RI could still be yes if the net profit increase is enough to cover the capital charge.
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Mee
11 months ago
I feel like RI could be positive because it considers the capital charge, but I'm confused about how the increase in assets affects the overall evaluation.
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Marion
11 months ago
I remember a similar question where we calculated ROI and RI separately. I think if the project increases profit but also increases capital employed significantly, it might not pass the ROI test.
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Matthew
11 months ago
I'm not entirely sure, but I think ROI might not be favorable since the increase in assets could dilute the profit margin.
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Lorrine
11 months ago
Hmm, I'm a bit unsure about this one. The question mentions that the servers all use root hints, so I'm wondering if forwarding is the right approach or if there's something else I'm missing. I'll need to think this through carefully.
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Danica
11 months ago
Hmm, I'm not sure. The level at which components will be independently changed seems like it could also be a big influence on the decision. We'd want to record CIs at a level that aligns with how the system is actually maintained.
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Leoma
11 months ago
Okay, I think I know the answer to this. NIST SP 800-30 is the one that defines impact, if I remember correctly.
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Herminia
1 year ago
I'm stumped! This is like a finance Rubik's cube. I wish the company would just make it simple and say, 'Do this project and stop asking questions!' But I guess that's not how the real world works.
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Luisa
1 year ago
User 3: Yeah, it seems like they need to consider both ROI and RI before making a decision.
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Gail
1 year ago
User 2: But RI won't motivate them?
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Johana
1 year ago
User 1: I think ROI will motivate them to accept the project.
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William
1 year ago
Haha, this is like a game of financial tug-of-war! The company wants to maximize both ROI and RI, but sometimes they can't have their cake and eat it too. I'll go with D) ROI No RI No, just to stir things up a bit.
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Casey
1 year ago
User 3
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Dexter
1 year ago
User 2
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Junita
1 year ago
User 1
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Tambra
1 year ago
Oh, this is tricky. Divisional managers are often evaluated based on both ROI and RI, so they'll have to weigh the pros and cons of this project carefully. I'd guess C) ROI No RI Yes, but I'm not fully confident.
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Naomi
1 year ago
But the increase in net profit may still result in a positive impact on RI.
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Esteban
1 year ago
Increasing average inventory and non-current assets will affect the division's ROI negatively.
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Elmer
1 year ago
Divisional managers need to consider the impact on both ROI and RI before accepting the project.
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Jose
1 year ago
Hmm, let's see. If the project increases net profit by $15,000 and the capital charge is 16%, the RI should increase. But with the additional capital employed, the ROI might decrease. I'll go with B) ROI Yes RI No.
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Tambra
1 year 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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Tamra
1 year ago
ROI Yes RI Yes
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Tamra
1 year ago
But the increased capital employed might make it look less attractive from the ROI perspective.
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Tamra
1 year ago
ROI Yes RI Yes
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Sylvia
1 year ago
But the increased capital employed might affect the ROI.
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Sylvia
1 year ago
B) ROI Yes RI No
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Sylvia
1 year ago
I think the project should be accepted based on the positive NPV.
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Sylvia
1 year ago
A) ROI Yes RI Yes
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Ellsworth
1 year ago
So, the answer could be A) ROI Yes RI Yes.
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Cyril
1 year ago
But RI might not motivate them since it doesn't consider the increase in profit.
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Howard
1 year ago
I think ROI will motivate them to accept the project because it increases net profit.
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