Accounting for Managers: Interpreting accounting information for decision-making

SOLUTIONS TO QUESTIONS 433

Using residual income, both Green and Brummy see an increase and will support the
investment.

13.4
Compax

1 2 3 4 Total

Cash flow 2.4 2.4 2.4 2.4 9.6

Depreciation 1.6 1.6 1.6 1.6

Profit 0.8 0.8 0.8 0.8 3.2

Asset value

opening 6.4 4.8 3.2 1.6

closing 4.8 3.2 1.6 0

Cost of capital

16% of opening

asset value 1.02 .77 .51 .26

RI −.22 0.03 0.29 0.54 0.64

ROI 12.5% 16.67% 25% 50%

Average ROI
Average profit 3. 2 / 4 = 0. 8
Average investment= 6. 4 / 2 = 3. 2
Average ROI= 0. 8 / 3. 2 =25%

Newpax

1 2 3 4 Total

Cash flow 2.6 2.2 1.5 1.0 7.3

Depreciation 1.3 1.3 1.3 1.3

Profit 1.3 0.9 0.2 −0.3 2.1

Asset value

opening 5.2 3.9 2.6 1.3

closing 3.9 2.6 1.3 0

Cost of capital

16% of opening

asset value 0.83 .62 .42 .21

RI .47 .28 −.22 −.51 .02

ROI 25% 23% 7.7% −23%

Average ROI
Average profit 2. 1 / 4 = 0. 525
Average investment= 5. 2 / 2 = 2. 6
Average ROI= 0. 525 / 2. 6 = 20 .2%

The NPV calculations show that Compax has a higher NPV at £315,634, giving a cash value
added of 4.9% (315,634/6,400,000). Newpax has an NPV of £189,615 and a cash value added
of 3.6% (189,615/5,200,000).