Calculation of before-tax return on capital, Financial Management

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Calculation of before-tax return on capital employed

Total net before-tax cash flow = 122 + 143 + 187 + 78 = $530000

Total depreciation = 250000 - 5000 = $245000

Average annual accounting profit = (530 - 245)/ 4 = $71,250

Average investment = (250000 + 5,000)/ 2 = $127500

Return on capital employed = 100 × 71250/ 127500 = 56%

Specified the target return on capital employed of Trecor Co is 20% and the ROCE of the investment is 56% the purchase of the machine is recommended.


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