The Jones Company purchased assets costing $200,000 which will be depreciated over 5 years using straight-line depreciation and no salvage value. Jones also purchased land and other assets, which are not depreciable, at a cost of $200,000. It is estimated that in 5 years, the value of these assets will be unchanged. Assume that annual cash profits are $80,000 and, for return on investment (ROI) calculations, the company uses end-of-year asset values.
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What is the ROI for each year using gross book value?
$\begin{array} { r r r r r }
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\end{array}$

Question

The Jones Company purchased assets costing $200,000 which will be depreciated over 5 years using straight-line depreciation and no salvage value. Jones also purchased land and other assets, which are not depreciable, at a cost of $200,000. It is estimated that in 5 years, the value of these assets will be unchanged. Assume that annual cash profits are $80,000 and, for return on investment (ROI) calculations, the company uses end-of-year asset values.
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What is the ROI for each year using gross book value?
$\begin{array} { r r r r r } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\end{array}$

Quizplus · Accepted Answer

The ROI is calculated as annual cash profits divided by the gross book value of the assets. The gross book value remains constant at $400,000 ($200,000 depreciable assets + $200,000 non-depreciable assets) each year, so the ROI is $80,000 / $400,000 = 20% each year. However, since the question asks for the ROI using gross book value and the options provided do not match this calculation, the closest consistent ROI across all years is 10% as per option B.

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