Question

With the help of the following information, calculate Return on Investment:

Net Profit after Interest and Tax ₹ 6,00,000; 10% Debentures ₹ 10,00,000; Tax @ 40%; Capital Employed ₹ 80,00,000.

Answer 1

Calculation of Net Profit before Tax:

\[\text{Net Profit before Tax} = \frac{\text{Net Profit after Tax}}{1 - \text{Tax Rate}}\]

$$\text{Net Profit before Tax} = \frac{6,00,000}{1 - 0.40} = \frac{6,00,000}{0.60}$$

$${\text{Net Profit before Tax} = ₹ 10,00,000}$$

Calculation of Net Profit before Interest and Tax:

$$\text{Interest on 10\% Debentures} = ₹ 10,00,000 \times 10\% = ₹ 1,00,000$$

Now, add interest back to find Net Profit before Interest and Tax:

$$ = \text{Net Profit before Tax} + \text{Interest Expense}$$

$$ = ₹ 10,00,000 + ₹ 1,00,000$$

$$ = ₹ 11,00,000$$

Calculation of Return on Investment:

$$\text{Return on Investment} = \left( \frac{\text{Net Profit before Interest and Tax (EBIT)}}{\text{Capital Employed}} \right) \times 100$$

$$\text{Return on Investment} = \left( \frac{11,00,000}{80,00,000} \right) \times 100 = 13.75\%$$

Return on Investment = 13.75%