The Jones Company purchased assets costing $200,000 which will be depreciated over 5-years using straight-line depreciation and no salvage value.The 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 gross book value? $$\begin{array} { | l | c | c | c | c | }
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \
\hline \text { A. } & 10.0 \% & 9.5 \% & 8.0 \% & 7.9 \% \
\hline \text { B. } & 10.0 \% & 10.0 \% & 10.0 \% & 10.0 \% \
\hline \text { C. } & 12.5 \% & 11.0 \% & 12.0 \% & 15.0 \% \
\hline \text { D. } & 10.0 \% & 12.5 \% & 14.0 \% & 17.0 \% \
\hline
\end{array}$$

Question

The Jones Company purchased assets costing $200,000 which will be depreciated over 5-years using straight-line depreciation and no salvage value.The 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 gross book value? $$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \
\hline \text { A. } & 10.0 \% & 9.5 \% & 8.0 \% & 7.9 \% \
\hline \text { B. } & 10.0 \% & 10.0 \% & 10.0 \% & 10.0 \% \
\hline \text { C. } & 12.5 \% & 11.0 \% & 12.0 \% & 15.0 \% \
\hline \text { D. } & 10.0 \% & 12.5 \% & 14.0 \% & 17.0 \% \
\hline
\end{array}$$

Quizplus · Accepted Answer

The ROI is calculated as (Annual Cash Profits / End-of-Year Asset Value). The depreciable assets decrease by $40,000 each year due to straight-line depreciation, but the non-depreciable assets remain at $200,000. Therefore, the end-of-year asset values are $400,000, $360,000, $320,000, and $280,000 for years 1 to 4, respectively. The ROI for each year is $80,000 divided by these values, which results in 20%, 22.2%, 25%, and 28.6%, respectively. However, the correct choice should reflect the consistent ROI of 10% each year, which is option B.

The Jones Company Purchased Assets Costing $200,000 Which Will Be