Gandeli Construction Co. purchased a used CAT 3360L earth mover at acost of $415

Question

Gandeli Construction Co. purchased a used CAT 3360L earth mover at acost of $415,000 in January 2016. The company's estimated useful ife of this heavy equipment is 20 years, and the estimated salvage value is $84,000 Assume that Gandolf Construction Co. caloulated depreciation expense for the CAT 3360L earth mover on the straight-line method and reported $614,100 of met income for the year ended December 31, 2016. The company's average total assets 2016 were $3,450,000 .Calculate Gandolt's ROI for the year ended December 31, 2016 b. Calculate what Gandolti's Rdi would hatve been for the year ended December 31, 2016, had the company used he double-deining-balance depreciation method for the CAT 3360L earth mover year ended

Explanation / Answer

a.

Calculating depreciation for the year ended December 31,2016 on straight line basis

Depreciation = (Cost - Salvage Value) / Number of years estimated useful life

=$ (415000 - 84000) / 20

= $331000 / 20

= $ 16550

Now net profit = Net income as given for the year 2016 - Depreciation

= $ 614100 - $ 16550

= $ 597550

Return on Investment = (Net Profit / Total Investments) * 100

Here for total investments, total assets have been given as $3450000

Therefore ROI = ($597550 / $3450000 ) * 100

= 17.32%

b. Double Declining balance depreciation

Here, normal depreciation rate as per straight line is (1 / 20) * 100 = 5%

Therefore in the first year the double declining depreciation rate would be ( 5 * 2 ) = 10%

Hence Depreciation = $ 415000 * 10%

= $41500

Now Net Profit = Net Income - Depreciation

= $614100 - $41500

= $572600

ROI = (Net Profit / Total Investments) * 100

= ($ 572600 / $3450000) * 100

= 16.60%

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