The following information was presented by Outdoors Manufacturing 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 Outdoors uses (a) the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?

Question

The following information was presented by Outdoors Manufacturing 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 Outdoors uses (a) the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?

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). ROI = ($6,000 / $20,000) * 100% = 30%. However, the correct ROI using beginning-of-year net book value is ($4,000 / $18,000) * 100% = 22.2%.

The Following Information Was Presented by Outdoors Manufacturing Company for an Asset