Question

State with reason whether the following transactions will increase, decrease or not change the ‘Return on Investment’ Ratio:
(i) Purchase of machinery worth ₹ 10,00,000 by issue of equity shares of 10 each at par.
(ii) Charging depreciation of ₹ 25,000 on machinery.
(iii) Redemption of debentures by payment of ₹ 2,00,000.
(iv) Conversion of 9% Debentures of ₹ 1,00,000 into 10% Debentures of 100 each at par.

Answer 1

Transaction	Impact
Purchase of machinery worth Rs 10,00,000 by issue of equity shares of 10 each at par.	Decrease. Issue of shares will lead to an increase in the capital employed by Rs 10,00,000. But profit remains intact, and so there will be a decline in the return on investment ratio.
Charging depreciation of Rs 25,000 on machinery.	Decrease. Simultaneous decrease in profits and capital employed by Rs 25,000 will lead to a decline in the return on investment ratio.
Redemption of debentures by payment of Rs 2,00,000.	Increase. Redemption of debentures will lead to a decrease in the capital employed by Rs 2,00,000. But profit remains intact, and so there will be an increase in the return on investment ratio.
Conversion of 9% Debentures of Rs 1,00,000 into 10% Debentures of 100 each at par.	No Change. This transaction is a conversion of one form of long-term debt into another. Total Long-term Debt and total Capital Employed (denominator) remain completely unchanged.