Question

Calculate Return on Investment from the following information :

Net Profit after Tax : Rs. 6,50,000; 12.5% Convertible Debentures : Rs. 8,00,000; Income Tax : 50%; Fixed Assets at cost : Rs. 24,60,000; Depreciation Reserve : Rs. 4,60,000; Current Assets : Rs. 15,00,000; Current Liabilities : Rs. 7,00,000.

Answer 1

Return on Investment = $\frac{NetProfitbeforeinterestandTax}{CapitalEmployed}\times 100$

Calculation of Net Profit before Interest and Tax :

$\begin{array}{cc}& \\ & \text{Rs.}\\ \text{Net Profit after Tax}& \underset{–}{6,50,000}\\ \text{Net Profit before tax 6,50,000}\times \frac{100}{50}& \text{13,00,000}\\ & \\ Add:\text{Interest:12.5 \% on}Rs.8,00,000& 1,00,000\\ & \underset{–}{\overline{14,00,000}}\end{array}$

Capital Employed = Net Fixed Assets + Current Assets - Current Liabilities

= (24,60,000 - 4,60,000) + 15,00,000 - 7,00,000

= 28,00,000

Return on Investment = $\frac{14,00,000}{28,00,000}\times 100=50\%$