Welsh Corporation's return on investment (ROI)on some new equipment was 20% using beginning-of-year net book value.The gross book value of the equipment is $250,000.Accumulated depreciation at the beginning of the year was $10,000.This represents one-half year's straight-line depreciation.What is the annual before-tax cash flow from the new equipment?

Question

Quizplus · Accepted Answer

The beginning net book value is $240,000 ($250,000 - $10,000). With an ROI of 20%, the annual return is $48,000 (20% of $240,000). Adding back the annual depreciation of $20,000 (since $10,000 is half-year), the before-tax cash flow is $68,000 ($48,000 + $20,000).

Welsh Corporation's Return on Investment (ROI)on Some New Equipment Was