Question

Mesopotamian Materials Inc. (MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below: (Same data as previous question but different question.)

Ur Babylon Fixed assets, gross 2,500 Babaylon Fixed aassets, gross 4,000

Ur Accumulated depreciation Ur - 1,500 Babylon Accum Deprec 1,200

Ur Other assets 500 Babylon Other assets 750

Ur Liabiities 500    Babylon Liabilities 1,000

Ur Sales 6,750    Babylon Sales 7,200

Ur Net Income after tax 743 Babylon Net Income after tax 1,008

Average age of fixed assets 15 5 MMI's weighted average cost of capital (WACC) is 11.5%. The MMI measures division performance based on the book value of net assets. The producer price index 15 years ago was 100, 116 five years ago, and currently is 125.

*Net income is after tax but before interest.

Which is true, when fixed asset costs are adjusted upward for inflation?

a. Babylon's RONA is 35.8%

b. Babylon's RONA is 26.3%

c. Ur's depreciation expense increases by $19 more than Babylon's

d. Baylon's price adjustment multiplier is 1.16

e. none of the above.

Answer 1

Solution : MMI has two decentralized divisions of fixed assets. 15 & 5 MM sca mnis weighted Average Average cost of capital is 1.54 The producer price index 15 years ago was 100,!! 6 5 years ago. È currently is 125 eis return on > sale met income / sales es $743 Netincome after tax is saies is $6,750 743/ 6.750 Oill X100 vi's RONA net income Icgross - fixed assets - accumulated depreciation 943|(2500-1500) = 7431 1000 = 0.764 xioo = 7hy.

Babyion's net asset tuin over =) Sales Crossfixed assets - accomuiated depreciation) = 7200/(1000 - 1200) :> 7200/2,800 = 2.57 Babylon's Rod = net income l gross fixed assets I 1008/1000 - 2546 :