The following information was presented by User-Friendly Industries Company for an asset purchased at the beginning of the previous year.
$$\begin{array} { l c }
\text { Original cost of the asset } & \$ 20,000 \
\text { Useful life of the asset } & 10 \text { years } \
\text { Annual operating profit, including depreciation } & \$ 4,000 \
\text { Salvage value } &\$ - 0 -
\end{array}$$
What is the return on investment (ROI) assuming User-Friendly uses (a) the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?
A) 11.1%.
B) 20.0%.
C) 22.2%.
D) 25.0%.

Question

The following information was presented by User-Friendly Industries Company for an asset purchased at the beginning of the previous year.
$$\begin{array} { l c } 
\text { Original cost of the asset } & \$ 20,000 \
\text { Useful life of the asset } & 10 \text { years } \
\text { Annual operating profit, including depreciation } & \$ 4,000 \
\text { Salvage value } &\$ - 0 -
\end{array}$$
What is the return on investment (ROI) assuming User-Friendly uses (a) the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?
A) 11.1%.
B) 20.0%.
C) 22.2%.
D) 25.0%.

Quizplus · Accepted Answer

The annual depreciation is $2,000 ($20,000/10 years). The operating profit excluding depreciation is $6,000 ($4,000 + $2,000). The average investment is $10,000 ($20,000/2). ROI = ($6,000 / $10,000) * 100% = 60%.

The Following Information Was Presented by User-Friendly Industries Company for an Asset