Carlton division has been stagnant for the past five years, neither growing nor contracting in size and profitability. Investment in new property, plant and equipment has been minimal. Would the division's use of total assets (valued at net book value) when measuring return on investment result in (1) using numbers that are consistent with those in the balance sheet and (2) a rising return on investment over time?

Question

Quizplus · Accepted Answer

Using total assets valued at net book value would provide consistent numbers with those in the balance sheet. However, since the division has not been investing in new property, plant and equipment, the net book value of its assets is likely to decline over time, resulting in a decreasing return on investment. Therefore, using total assets valued at net book value may not accurately reflect the division's true performance.

Carlton Division Has Been Stagnant for the Past Five Years