Thorpedo Ltd reported a return on assets of 15% for the year ending 31 December. It also acquired a licence for cash by paying $1m at the end of the year ending 31 December. This licence is expected to generate net profits of $0.1m per year and the asset is not amortised. Assuming the results for the next financial year mirror the year ending 31 December and the licence did increase net profit by $0.1m. What is the effect on Thorpedo Ltd's return on assets for this subsequent financial year?
A) A decrease
B) An increase
C) No change
D) Cannot be determined

Question

Quizplus · Accepted Answer

The acquisition of the license increases the asset base by $1m without a corresponding increase in net profits that would maintain the previous return on assets (ROA) percentage. The additional $0.1m profit does not offset the increase in assets proportionally, leading to a decrease in ROA.

Thorpedo Ltd Reported a Return on Assets of 15% for the Year