The Jones Company purchased assets costing $200,000 which will be depreciated over 5 years using straight-line depreciation and no salvage value. Jones also purchased land and other assets, which are not depreciable, at a cost of $200,000. It is estimated that in 5 years, the value of these assets will be unchanged. Assume that annual cash profits are $80,000 and, for return on investment (ROI) calculations, the company uses end-of-year asset values.
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What is the ROI for each year using net book value?
$\begin{array} { l r r r r }
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\end{array}$
A)$\begin{array} { l r r r r } & 11.1 \% & 12.5 \% && 14.3 \% & 16.7 \% \\end{array}$
B) $\begin{array} { l r r r r } & 10.0 \% & 10.0 \% && 10.0 \% & 10.0 \% \\end{array}$
C) $\begin{array} { l r r r r } & 10.0 \% & 8.9 \% &&& 7.3 \% & 6.5 \% \\end{array}$
D) $\begin{array} { l r r r r } & 11.1 \% & 11.5 \% && 12.9 \% & 12.3 \%
\end{array}$

Question

The Jones Company purchased assets costing $200,000 which will be depreciated over 5 years using straight-line depreciation and no salvage value. Jones also purchased land and other assets, which are not depreciable, at a cost of $200,000. It is estimated that in 5 years, the value of these assets will be unchanged. Assume that annual cash profits are $80,000 and, for return on investment (ROI) calculations, the company uses end-of-year asset values.
-
What is the ROI for each year using net book value?
$\begin{array} { l r r r r } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\end{array}$
A)$\begin{array} { l r r r r }  & 11.1 \% & 12.5 \% && 14.3 \% & 16.7 \% \\end{array}$
B) $\begin{array} { l r r r r }  & 10.0 \% & 10.0 \% && 10.0 \% & 10.0 \% \\end{array}$
C) $\begin{array} { l r r r r } & 10.0 \% & 8.9 \% &&& 7.3 \% & 6.5 \% \\end{array}$
D) $\begin{array} { l r r r r } & 11.1 \% & 11.5 \% && 12.9 \% & 12.3 \%
\end{array}$

Quizplus · Accepted Answer

The ROI is calculated as annual cash profits divided by the net book value of the assets at the end of each year. The depreciable assets decrease in value by $40,000 each year, while the non-depreciable assets remain at $200,000. The ROI for each year is calculated as follows: Year 1: $80,000 / ($200,000 + $160,000) = 11.1%, Year 2: $80,000 / ($200,000 + $120,000) = 12.5%, Year 3: $80,000 / ($200,000 + $80,000) = 14.3%, Year 4: $80,000 / ($200,000 + $40,000) = 16.7%.

The Jones Company Purchased Assets Costing $200,000 Which Will Be Year 1 Year 2 Year 3 Year 4 \begin{array} { l r r r r } & \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\\end{array}​ Year 1​ Year 2 ​ Year 3 ​ Year 4 ​

The Jones Company Purchased Assets Costing $200,000 Which Will Be $\begin{array} { l r r r r } & \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\\end{array}$