Question

Net Profit after Interest but before Tax ₹ 65,000; Shareholder’s Funds ₹ 3,00,000; 15% Long-Term Debt ₹ 1,00,000. Calculate Return on Investment.

Note: It is assumed that Shareholder's Funds include current year’s profits.

Answer 1

Net Profit before Interest and Tax = Net Profit after Interest but before Tax + 15% of Long-Term Debt

= ₹ 65,000 + `15/100 xx ₹ 1,00,000`

= ₹ 65,000 + ₹ 15,000

= ₹ 80,000

Capital Employed = Shareholder’s Funds + Long-Term Debt

= ₹ 3,00,000 + ₹ 1,00,000

= ₹ 4,00,000

Return on Investment = `"Net Profit before Interest and Tax"/"Capital Employed" xx 100`

= `(₹ 80,000)/(₹ 4,00,000) xx 100`

= 20%