T-shirts R Us Inc.operates two divisions that each manufactures t-shirts for universities.Each division has its own manufacturing facility.The historical-cost accounting system reports the following data for 2010.

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T-shirts R Us Inc.estimates the useful life of each manufacturing facility to be 15 years.The company uses straight line depreciation,with a depreciation charge of $70,000 per year for each division and no salvage value at the end of 15 years.The manufacturing facility is the only long-lived asset of either division.Current assets are $300,000 in each division.At the end of 2010 the Atlantic Coast Division is 4 years old and the Big 10 Division is 6 years old.An index of construction costs,replacement cost,and liquidation values for manufacturing facilities for production of t-shirts for the 7-year period that T-shirts R Us Inc.has been operating is as follows: 11ea6e70_bd70_2fa3_8f54_954f31148304_TB1699_00 
Required:Round answers to 2 decimal places where appropriate.
(1)Compute return on investment (ROI)for each division using net book value (NBV).Interpret the results.
(2)Compute return on investment (ROI)for each division,incorporating current-cost estimates as follows,using:
(a)Gross book values (GBV)under historical cost;
(b)GBV at historical cost restated to current cost using the index of construction costs;
(c)NBV of long-lived assets restated at current cost using the index of construction costs (the
facility was constructed the year before the first year of use);
(d)Current replacement cost;and
(e)Current liquidation value.
(3)Which of the measures calculated in (2)above would you choose for (a)performance evaluation of each division manager,and (b)deciding which division is most profitable for the overall firm.What are the (a)and (b)?
Please see Feedback for answers.
 Feedback: (1)ROI based on NBV of Assets (Note: $300 other (current)assets added to all computations to achieve total asset base):
? Atlantic Coast (ACC): $70 x 11 years remaining useful life = $770;
? ROI-ACC: $130/($770 + $300)= 12.15%.
? Big 10: $70 x 9 years remaining useful life = $630
? ROI-Big 10: $200/($630 + $300)= 21.51%.
Thus,the Big Ten Division is more profitable than the ACC Division under NBV-based ROI.
(2)(a)Gross Book Value (GBV)of Fixed Assets:
? ACC: 15 x $70 = $1,050 (Depreciation x useful life)
? ROI-ACC: $130/($1,050 + $300)= 9.63%
? Big-Ten: Gross Book Value (GBV)of Fixed Assets: 15 x $70 = $1,050 (Depreciation x useful life)
? ROI-Big-Ten: $200/($1,050 + $300)= 14.81%
(2)(b)ROI based on Price-Level Adjusted Gross Book Value (GBV): (GBV at historical cost)x (construction cost index in 2010/Construction cost in year of construction)
? GBV-ACC: $1,050 x (100/84)= $1,250
? ROI-ACC: $130/($1,250 + $300)= 8.39%
? GBV-Big-Ten: $1,050 x (100/80)= $1,312.50
? ROI-Big-Ten: $200/($1,312.50 + $300)= 12.40%
(2)(c)ROI based on price-level adjusted NPV: (NBV at historical cost)x (construction cost index in 2010/Construction cost in year of construction)
? ACC: $1,070 x (100/84)= $1,273.30
? ROI-ACC: $130/($1,273.30 + $300)= 8.26%
? Big Ten: $930 x (100/80)= $1,162.50
? ROI-Big-Ten: $200/($1,162.50 + $300)= 13.68%
(2)(d)ROI Based on Current Replacement Cost:
? ROI-ACC: $130/($1,300 + $300)= 8.13%
? ROI-Big-Ten: $200/($1,300 + $300)= 12.5%
(2)(e)ROI Based on Current Liquidation Value:
? ROI-ACC: $130/($1,000 + $300)= 10%
? ROI-Big-Ten: $200/($500 + $300)= 25%
(3)(a)The best measure for evaluating the manager is replacement cost,as it corresponds to the "going-concern" value of the investment.The objective is to identify a measure of investment that fairly reflects the productive capacity of the assets.Often,NBV falls much faster than the productive capability of the assets,and thus,the ROI with the older assets overstates the profitability of the unit.The use of GBV or current cost can help reduce the bias favoring divisions with older assets.It is superior to NBV and GBV,which are not related to the current value of the investment.While the GBV of the investment is superior to NBV (since it is not biased by the age of the assets),a direct measure of current value such as replacement cost is preferable.Liquidation value is not used because the divisions are not for sale,nor is sale of either division currently contemplated.The advantages of the replacement cost measure are fairness,since it avoids the age bias issues associated with the NBV measure,and motivation,since it reflects the current value of the asset and therefore what investment value the manager has to work with.The use of a construction cost index is a further improvement on GBV,and is
useful when a reasonably meaningful measure of replacement cost is not available because,for example,the assets are very specialized and replacement costs would be extremely high.
(3)(b)The evaluation of the division should use replacement cost for the same reasons as explained in (a)above.The only difference here is when either division might be sold or relocated,in which case the liquidation value is relevant.Top management can also look at the liquidation value ROI as a direct measure of whether the business or division should be sold-the division should earn a favorable return on liquidation value,and if not,then management should consider liquidation.

T-Shirts R Us Inc