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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Herminia

1 months 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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Gail

14 days ago

User 2: But RI won't motivate them?

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Johana

18 days ago

User 1: I think ROI will motivate them to accept the project.

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William

2 months 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

18 days ago

User 3

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Dexter

27 days ago

User 2

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Junita

1 months ago

User 1

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Tambra

2 months 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

10 days ago

But the increase in net profit may still result in a positive impact on RI.

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Esteban

14 days ago

Increasing average inventory and non-current assets will affect the division's ROI negatively.

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Elmer

1 months ago

Divisional managers need to consider the impact on both ROI and RI before accepting the project.

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Jose

2 months 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

2 months 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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