Which of the following should NOT be considered when calculating return on invested capital (ROIC)? (0.5 mark) 0 A Deferred tax resulting from differences in depreciation calculations with the government authority B. Revenues from consolidated subsidiaries C. Cash balance that's 2 percent of the X total asset, where the historical industry average is 3% D Depreciation expenses from property, plant and equipment (PPE)
Question
Which of the following should NOT be considered when calculating return on invested capital (ROIC)? (0.5 mark) 0 A Deferred tax resulting from differences in depreciation calculations with the government authority B. Revenues from consolidated subsidiaries C. Cash balance that's 2 percent of the X total asset, where the historical industry average is 3% D Depreciation expenses from property, plant and equipment (PPE)
Solution
Return on Invested Capital (ROIC) is a profitability or performance measure that indicates how effectively a company is using its capital to generate profits. It is calculated by dividing the net operating profit after taxes (NOPAT) by the invested capital.
A. Deferred tax resulting from differences in depreciation calculations with the government authority - This should be considered when calculating ROIC as it affects the net operating profit after taxes (NOPAT).
B. Revenues from consolidated subsidiaries - This should also be considered when calculating ROIC as it contributes to the total operating profit of the company.
C. Cash balance that's 2 percent of the total asset, where the historical industry average is 3% - This should NOT be considered when calculating ROIC. ROIC is a measure of profitability relative to the capital invested in the business, not relative to the total assets or cash balance of the company.
D. Depreciation expenses from property, plant and equipment (PPE) - This should be considered when calculating ROIC as it affects the net operating profit.
So, the correct answer is C. Cash balance that's 2 percent of the total asset, where the historical industry average is 3% should not be considered when calculating ROIC.
Similar Questions
Which of the following statements is correct about the return on invested capital (ROIC) ratio? 0 a. Firms that have a ROIC higher than its cost of equity ratio can generate positive value. 0 b. Firms can have a higher ROIC when they are able to set a rational price discipline. O c. Depreciation expense should not be considered when calculating ROIC since it involves no cash transaction. O d All of the above. 0 e. None of the above.
Which of the following improves a company's return on invested capital (ROIC)? 0 a. Obtain tax benefits through taking on debt 0 b. Minimise restructuring charges O c. Reduce expenses related to pensions 0 d. Use research asset efficiently to generate revenue 0 e. All of the above
Return on investment (ROI) is commonly expressed in each of the following ways, except Blank______.Multiple choice question.ROI = Net income / ((Beginning of year total assets + end of year total assets) / 2)ROI = Operating income / Average operating assetsROI = Net income / Average total assetsROI = Net income / Average stockholders' equity
Return on investment (ROI) is a measure of:a.Profitabilityb.Efficiencyc.Liquidity
2a) A company is considering investing in a new project that requires an initial investment of $50,000. The project is expected to generate cash inflows of $10,000 per year for the next five years. The salvage value of the project at the end of the fifth year is estimated to be $5,000. The company uses straight-line depreciation for all its capital investments. Calculate the Accounting Rate of Return for this project. 2b) Suppose a company is considering a new project that requires an initial investment of $50,000. The company's cost of capital 8%. What is the NPV of the project?
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