Ocean Division currently earns $780,000 and has divisional assets of $3.9 millio

Question

Ocean Division currently earns $780,000 and has divisional assets of $3.9 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $675,000 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 15 percent. Ignore taxes.

Required:
(a) What is the divisional ROI before acquisition of the new asset? (Omit the "%" sign in your response.)

ROI before acquisition ? %

(b)

What is the divisional ROI in the first year after acquisition of the new asset? (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

ROI after acquisition ? %

Explanation / Answer

a)ROI before acquisition (in %) =$780,000/$3.9 million = 20% B) After acquisition, Total asset = $3.9 million + $675,000 = 4,575,000 Annual depreciation =$675,000/6 =$112500 Annual earnings after acquisitions = $780,000 + $168,000-$112500 = $835,500 ROI after acquisition (in %) = $835,500/4,575,000 = 18.3%

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