One division of the Marvin Educational Enterprises has depreciable assets costin

Question

One division of the Marvin Educational Enterprises has depreciable assets costing $4,400,000. The cash flows from these assets for the past three years have been:

The current (i.e., replacement) costs of these assets were expected to increase 20% each year. Marvin used the straight-line depreciation method; the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.

What is the ROI using historical cost and gross book value?

Explanation / Answer

ROI (year 1) = (Cash flows for year 1/Cost of depreciable asset)*100

= ($1,496,000/$4,400,000)*100 = 34%

ROI (year 2) = (Cash flows for year 2/Cost of depreciable asset)*100

= ($1,716,000/$4,400,000)*100 = 39%

ROI (year 3) = (Cash flows for year 3/Cost of depreciable asset)*100

= ($1,870,000/$4,400,000)*100 = 42.5%

Therefore the correct option is D.) Year 1 = 34.0%, Year 2 = 39.0%, Year 3 = 42.5%

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