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 current costs and net book value?
$\begin{array} { l c c c }
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } \\end{array}$
A. $\begin{array} { l c c c } & 14.9 \% & 15.9 \% & 16.0 \% \\end{array}$
B.$\begin{array} { l c c c } & 15.8 \% & 15.9 \% & 14.9 \% \\end{array}$
C.$\begin{array} { l c c c } & 15.6 \% & 15.9 \% & 15.3 \% \\end{array}$
D. $\begin{array} { l c c c } & 15.9 \% & 15 \% & 11.9 \%\end{array}$

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 current costs and net book value?
$\begin{array} { l c c c } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } \\end{array}$
 A. $\begin{array} { l c c c } & 14.9 \% & 15.9 \% & 16.0 \% \\end{array}$
B.$\begin{array} { l c c c } & 15.8 \% & 15.9 \% & 14.9 \% \\end{array}$
C.$\begin{array} { l c c c } & 15.6 \% & 15.9 \% & 15.3 \% \\end{array}$
D. $\begin{array} { l c c c } & 15.9 \% & 15 \% & 11.9 \%\end{array}$

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. The net book value decreases by $400,000 each year due to straight-line depreciation. The replacement cost increases by 25% each year. Calculating these values and using the cash flows provided, the ROI for each year matches the percentages in option C.

One Division of the Marvin Educational Enterprises Has Depreciable Assets