Noonan Division has total assets (net of accumulated depreciation) of $2,500,000

Question

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 $290,000. Expected divisional income in year 1 is $420,000 including $36,000 in income generated by the machine (after depreciation). Noonan’s cost of capital is 7 percent. Noonan is considering disposing of the asset today (the beginning of year 1).

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.)

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.)

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.)

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)? (R

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 $290,000. Expected divisional income in year 1 is $420,000 including $36,000 in income generated by the machine (after depreciation). Noonan’s cost of capital is 7 percent. Noonan is considering disposing of the asset today (the beginning of year 1).

Explanation / Answer

Solution.

ROI = (Net Income / Total Investment)*100

Part (a). Divisional Income = $420000

Total Assets = $2500000

ROI = ($420000 / $2500000)*100 = 16.80%

Part (b). Divisional residual income = $420000 - $36000 = $384000

Divisional Residual Assets = $2500000 - $290000 = $2210000

ROI = ($384000 / $2210000)*100 = 17.38%

Part (c). Divisional residual income for year 1 assuming Noonan retains the asset = $420000

Part (d). Divisional residual income = $420000 - $36000 = $384000

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