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Edlintics

Investment base

Investment base is the stock of capital a divisional manager is accountable for deploying. The base is the denominator in return on investment and residual income calculations.

Also known asasset base

ByHoang TruongUpdated

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A side-by-side comparison applies the same €180,000 operating profit to two investment base definitions. Using net book value of €800,000 as the denominator gives an ROI of 22.5%; using the current cost of €1,050,000 gives an ROI of 17.1%. Because the profit figure is identical in both columns, the entire 5.4 percentage-point difference in return arises solely from the denominator choice. The note states that the measurement decision changes the return signal, which in turn affects how managers and analysts evaluate divisional performance.

Where it fits
SubjectManagerial AccountingAdvancedTopicDivisional Performance MeasurementAdvanced

The formula

LaTeX
Net Book Value=Original Cost−Accumulated Depreciation\text{Net Book Value} = \text{Original Cost} - \text{Accumulated Depreciation}

Variables

Carrying amount of assets; the most common form of investment base (€)
Total depreciation charged against the asset since acquisition (€)

Alternative: current cost (replacement cost today). The investment base is the denominator in both ROI and residual income.

LaTeX
ROI=Operating IncomeInvestment Base\text{ROI} = \frac{\text{Operating Income}}{\text{Investment Base}}

Variables

Return on investment (%)
LaTeX
RI=Operating Income−(Required Rate×Investment Base)\text{RI} = \text{Operating Income} - (\text{Required Rate} \times \text{Investment Base})

Variables

Residual income; positive means the division earns above the required return (€)
Minimum acceptable rate of return set by the organisation (%)