Candidates were asked here to calculate the before-tax return on capital employed (ROCE) of the investment project on an average investment basis and to discuss briefly its financial acceptability.

Many candidates did not gain full marks here because they were not sure of how to calculate ROCE for investment appraisal purposes. The definition of ROCE in this case is average annual accounting profit as a percentage of average annual investment.

Since the NPV evaluation was in cash flow terms, accounting profit had to be calculated by subtracting depreciation from investment project cash flows, a point overlooked by some candidates. Some candidates were also not aware that average annual accounting profit, rather than total accounting profit, was needed.

Some candidates incorrectly chose to calculate internal rate of return (IRR), perhaps because they were confusing ROCE with IRR. It is also possible that this error was partly due to the fact that both ROCE and IRR are relative measures of investment worth.