Question

Check my work Harbor Division has total assets (net of accumulated depreciation) of $678,000 at the beginning of year 1. Harbor also leases a machine for $24,000 annually. Expected divisional income in year 1 is $83,000 including $5,100 in income generated by the leased machine (after the lease payment). Harbor's cost of capital is 12 percent. Harbor can cancel the lease on the machine without penalty at any time and is considering disposing of it today (the beginning of year 1) Required: a. Harbor computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Harbor retains the leased machine? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).) b. What would divisional ROI be for year 1 assuming Harbor disposes of the leased machine? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).) c. Harbor computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Harbor retains the leased machine? d. What would divisional residual income be for year 1 assuming Harbor disposes of the leased machine? a. ROI before disposal b. ROI after disposal c. Residual income before disposal % d. Residual income after disposal Prev 1 of 3 Next >

Answer 1

Please find below table useful to compute desired results: -

А B 1 Divisional Income 83000 2 Income from Lease 5100 3 Total Assets 678000 4 Required Rate of return =12/100 5 ROI before Disposal =B1/B3 6 ROI after Disposal =(B1-B2)/B3 7 Residual before Disposal =B1-B3*B4 8 Residual after Disposal =B1-B2-B3*B4

End results would be as follows: -

А 1 Divisional Income 2 Income from Lease 3 Total Assets 4 Required Rate of return 5 ROI before Disposal 6 ROI after Disposal 7 Residual before Disposal 8 Residual after Disposal $83,000.00 $5,100.00 S678,000.00 12% 12.24% 11.49% $1,6401 -$3,460