Early in January 2010, Tellco, Inc., acquired a new machine and incurred $100,00

Question

Early in January 2010, Tellco, Inc., acquired a new machine and incurred $100,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $1,000,000 on average total assets of $8,000,000 for 2011. Asume that the total cost of the new machine will be depreciated over 10yrs using the straight line method. a. Calculate the ROI for Tellco, Inc., for 2010 b Calculate ROI for Tellco, Inc for 2010, assuming that the $100,000 had been capitalized and depreciated over 10 years using the straight-line method. c. Given your answers to a and be, why would the company want to account for this expenditure as an expense? d. Assuming that the $100,000 is capitalzed, what will be the effect on ROI for 2011 and subsequent yrs. compared to expensing theinterest, installation and overhead costs in 2010? Explain your answer? I am not understanding the process on how some of these answer were giving.

Explanation / Answer

a) ROI = operating income/average total assets = 1,000,000/8,000,000 = 12.5% b) Amount will be depreciated 100,000 Estimate useful life over 10 years Depreciation expense in current year 10,000 Operating Income reported 1,000,000 Installation and overhead costs (100,000) Decrease in depreciation expense 10,000 910,000 ROI = operating income/average total assets = 910,000/8,000,000 = 11.38%

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