One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000. The cash flows from these assets for the past three years have been:
$$\begin{array} { c l l }
\text { Year } & { \text { Cash flows } } \
1 & \mathbf { \$ } 1,200,000 \
2 & \$ 1,400,000 \
3 & \$ 1,620,000
\end{array}$$
The current (i.e., replacement) costs of these assets were expected to increase 25% each year.
-Marvin used the straight-line depreciation method and the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.
What is the ROI using historical cost and net book value?
$\begin{array} { l r r r }
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } \\end{array}$
A.$\begin{array} { l r r r } & 21.5 \% & 34.0 \% & 42.0 \% \\end{array}$
B.$\begin{array} { l r r r } & 22.2 \% & 31.3 \% & 43.0 \% \\end{array}$
C.$\begin{array} { l r r r } & 23.0 \% & 32.0 \% & 47.0 \% \\end{array}$
D. $\begin{array} { l r r r } & 24.9 \% & 35.0 \% & 49.5 \%\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000. The cash flows from these assets for the past three years have been:
$$\begin{array} { c l l } 
\text { Year } &  { \text { Cash flows } } \
1 & \mathbf { \$ } 1,200,000 \
2 & \$ 1,400,000 \
3 & \$ 1,620,000
\end{array}$$
The current (i.e., replacement) costs of these assets were expected to increase 25% each year. 
-Marvin used the straight-line depreciation method and the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.
What is the ROI using historical cost and net book value?
$\begin{array} { l r r r } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } \\end{array}$
A.$\begin{array} { l r r r } & 21.5 \% & 34.0 \% & 42.0 \% \\end{array}$
B.$\begin{array} { l r r r }  & 22.2 \% & 31.3 \% & 43.0 \% \\end{array}$
C.$\begin{array} { l r r r } & 23.0 \% & 32.0 \% & 47.0 \% \\end{array}$
D. $\begin{array} { l r r r } & 24.9 \% & 35.0 \% & 49.5 \%\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Quizplus · Accepted Answer

The ROI is calculated using the formula: ROI = (Net Income / Average Investment) * 100. The average investment is the average of the beginning and end-of-year net book values. Using straight-line depreciation, the annual depreciation is $400,000. The net book values at the end of each year are $3,600,000, $3,200,000, and $2,800,000, respectively. The average investments are $3,800,000, $3,400,000, and $3,000,000. The ROIs are 22.2%, 31.3%, and 43.0% for years 1, 2, and 3, respectively.

One Division of the Marvin Educational Enterprises Has Depreciable Assets