A division of a firm has a net profit of $640 000 before imputed interest and a residual income of $240 000. If a rate of 10 per cent is used to compute imputed interest, calculate the division's return on investment (rounded to a whole number).
A) 4%
B) 10%
C) 16%
D) 35%

Question

Quizplus · Accepted Answer

Return on investment (ROI) = net profit / investment
Residual income = net profit - (imputed interest rate × investment)

Let investment be I
Given, net profit = $640 000
Residual income = $240 000
Imputed interest rate = 10%

Therefore, 240 000 = 640 000 - (0.1 × I)
I = 4,000,000

ROI = 640 000 / 4,000,000 = 0.16 = 16%
Thus, the division's return on investment (ROI) is 16%, which is given by choice C.

A Division of a Firm Has a Net Profit of $640