SOLUTION
Return on Investment = (Net Profit before Interest, Tax and Dividend / Capital Employed × 100)
Let Profit before tax be Rs. 100
Tax = Rs. 20
Profit after tax = (100 – 20) = Rs. 80
If Profit after tax is Rs. 80 then profit before tax is = Rs. 100
If Profit after tax is Rs. 1,00,000 then profit before tax is = (1,00,000 × 100 / 80)
= Rs. 1,25,000
Interest on long-term borrowings = (4,00,000 × 10 / 100)
= Rs. 40,000
Profit after interest and Tax = (1,25,000 + 40,000)
= Rs. 1,65,000
Capital Employed = Fixed Assets+ Current Assets – Current Liabilities
= (6,00,000 + 4,00,000 – 2,00,000)
= Rs. 8,00,000
Return on Investment = (1,65,000 / 8,00,000 × 100 )
= 20.625% or 20.63% (approx.)