ACC501 Assignment no.1 Fall 2020

 

Particulars	Before Proposed Investment (Amount in Rs.)	After Proposed Investment (Amount in Rs.)
Sales	860,000
Net profit	95,000	120,000
Assets	1,075,000	1,205,000
Total Debts	430,000	560,000
Total Equity	645,000	645,000

 

Requirement # a) Compute N.M’s ROA and ROE before and after the proposed investment.

 

ROA Before Proposed Investment:

 = Net Income/ Total Asset

=Rs.95,000/Rs.1,075,000

=0.0884

ROA After Proposed Investment:

 = Net Income/ Total Asset

=Rs.120,000/Rs.1,205,000

=0.0996

 

ROE Before Proposed Investment:

 = Net Income/ Shareholder’s Equity

=Rs.95,000/Rs.645,000

=0.1473

 

 

ROE After Proposed Investment:

 = Net Income/ Shareholder’s Equity

=Rs.120,000/Rs.645,000

=0.186

N.M should go for the investment as ROA & ROE increased after proposed investment.

 

 

 

Supporting Calculations

1- Total Assets Before Proposed Investment:-

Total assets turnover ratio= Total sales/Average assets

0.8=Rs.860,000/Average assets

0.8 Average assets= Rs.860,000

Average assets=Rs.860,000/0.8

Average Assets=Rs.1,075,000

Average assets are assets before proposed investment

 

2- Total Debts Before Proposed Investment:-

Debt ratio= Total debts/ Total assets

0.4=Total debts/ Rs.1,075,000

0.4XRs.1,075,000 =Total debts

Total debts =Rs.430,000

3-  Equity Before Proposed Investment:-

Assets= Owner’s equity- Liabilities

Rs.1,075,000= Owner’s equity – Rs.430,000

Rs.1,075,000-Rs.430,000= Owner’s equity

Owner’s equity= Rs.645,000

4- Net Profit After Proposed Investment:-

Rs.95,000 + Rs.25,000=Rs.120,000

5- Assets After Proposed Investment:-

  Rs.1,075,000+ Rs.130,000= Rs.1,205,000

Assets were purchased by taking loan Rs.130,000 and Rs.130,000 were paid cash from the business.

6- Debts After Proposed Investment:-

 Rs.430,000+ Rs.130,000=Rs.560,000