Question

State with reason whether the following transactions will increase, decrease or not change the 'Return on Investment': 

(i) Purchase of machinery worth Rs 2,00,000 by issue of equity shares.
(ii) Charging depreciation of Rs 5,000 on machinery.
(iii) Redemption of debentures in cash Rs 70,000.
(iv) Converting Rs 50,000, 9% debentures into equity shares.

Answer 1

Transaction	Implication
Purchase of machinery worth Rs 2,00,000 by issue of equity shares.	Increase in capital employed (due to issue of shares) by Rs 2,00,000 with fixed amount of profits will lead to a decline in return on investment.
Charging depreciation of Rs 5,000 on machinery.	Simultaneous decrease in profits and capital employed by Rs 5,000 will lead to a decline in return on investment
Redemption of debentures in cash Rs 70,000.	Decrease in capital employed (due to redemption of debentures) by Rs 70,000 with fixed amount of profits will lead to an increase in return on investment.
Converting Rs 50,000, 9% debentures into equity shares.	Simultaneous increase and decrease in capital employed (due to decrease in debentures and increase in share capital) will leave the return on investment unchanged.