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:
$$\begin{array} { | c | r | }
\hline \text { Year } & \text { Cash flows } \
\hline 1 & \$ 1,200,000 \
\hline 2 & \$ 1,400,000 \
\hline 3 & \$ 1,620,000 \
\hline
\end{array}$$ The current (i.e. ,replacement)costs of these assets were expected to increase 25% each year.Marvin used the straight-line depreciation method;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?$$\begin{array} { | l | c | c | c | }
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { A. } & 14.6 \% & 15.9 \% & 16.0 \% \
\hline \text { B. } & 15.8 \% & 15.9 \% & 14.9 \% \
\hline \text { C. } & 15.6 \% & 15.5 \% & 15.3 \% \
\hline \text { D. } & 15.6 \% & 15.8 \% & 11.9 \% \
\hline
\end{array}$$

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:
$$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash flows } \
\hline 1 & \$ 1,200,000 \
\hline 2 & \$ 1,400,000 \
\hline 3 & \$ 1,620,000 \
\hline
\end{array}$$  The current (i.e. ,replacement)costs of these assets were expected to increase 25% each year.Marvin used the straight-line depreciation method;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?$$\begin{array} { | l | c | c | c | } 
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { A. } & 14.6 \% & 15.9 \% & 16.0 \% \
\hline \text { B. } & 15.8 \% & 15.9 \% & 14.9 \% \
\hline \text { C. } & 15.6 \% & 15.5 \% & 15.3 \% \
\hline \text { D. } & 15.6 \% & 15.8 \% & 11.9 \% \
\hline
\end{array}$$

Quizplus · Accepted Answer

To calculate ROI using current costs and net book value, we need to calculate the current net book value of the assets at the end of year three. 
Using the straight-line depreciation method, the annual depreciation expense is $400,000 ($4,000,000/10 years). Therefore, the accumulated depreciation at the end of year three is $1,200,000 ($400,000 x 3 years). 
The net book value at the end of year three is $2,800,000 ($4,000,000 - $1,200,000). 
To calculate ROI, we need to divide the income generated from the assets by the net book value. 
The income generated from the assets is the sum of the cash flows from the past three years, which is $1,200,000 ($400,000 + $400,000 + $400,000). 
Therefore, ROI = $1,200,000 / $2,800,000 = 0.43 or 43%. 
Option C is correct as it gives the ROI of 43%.

One Division of the Marvin Educational Enterprises Has Depreciable Assets