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Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
Edition 2ISBN: 978-0077274993Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
Edition 2ISBN: 978-0077274993 Exercise 14
Impact of New Project on Performance Measures
Ocean Division currently earns $780,000 and has divisional assets of $2.6 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $450,000 and will have a yearly cash flow of $168,000. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 20 percent. Ignore taxes.
Required
a. What is the divisional ROI before acquisition of the new asset
b. What is the divisional ROI in the first year after acquisition of the new asset
Ocean Division currently earns $780,000 and has divisional assets of $2.6 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $450,000 and will have a yearly cash flow of $168,000. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 20 percent. Ignore taxes.
Required
a. What is the divisional ROI before acquisition of the new asset
b. What is the divisional ROI in the first year after acquisition of the new asset
Explanation
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(a)Divisional Return on Investment
The ...
Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
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