Exercise 14-28 Impact of an Asset Disposal on Performance Measures (LO 14-2, 3)

Question

Exercise 14-28 Impact of an Asset Disposal on Performance Measures (LO 14-2, 3) Noonan Division has total assets (net of accumulated depreciation) of $2,500,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $270,000. Expected divisional income in year 1 is $370,000 including $24,000 in income generated by the machine (after depreciation). Noonan’s cost of capital is 9 percent. Noonan is considering disposing of the asset today (the beginning of year

Noonan computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset? (Round your answer to 1 decimal place.)

ROI before disposal (%)

What would divisional ROI be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)? (Round your answer to 1 decimal place.)

ROI after disposal (%)

Noonan computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Noonan retains the asset? (Round your answer to the nearest dollar amount.)

Residual Income before disposal ($)

What would divisional residual income be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)? (Round your answer to the nearest dollar amount.)

Residual income After disposal ($)

Please show calculations and equations

Explanation / Answer

Calculation of ROI before disposal After disposal Net income $      3,70,000.00 $    3,46,000.00 Net assets $    25,00,000.00 $ 22,30,000.00 ROI 14.80% 15.52% Calculation of Residual Income before disposal After disposal Net Assets $    25,00,000.00 $ 22,30,000.00 Cost of capital 9% 9% Required income $      2,25,000.00 $    2,00,700.00 Actual Income $      3,70,000.00 $    3,46,000.00 Required income $      2,25,000.00 $    2,00,700.00 Residual income $      1,45,000.00 $    1,45,300.00

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