Question

Check my work 9 The Singer Division of Patio Enterprises currently earns $2.34 million and has divisional assets of $19.5 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,375,000 and will have a yearly cash flow of $840,000. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 9 percent. Ignore taxes. The division manager learns that he has the option to lease the asset on a year-to-year lease for $740,000 per year. All depreciation and other tax benefits would accrue to the lessor. 1 points еВook Required: What is the divisional ROl if the asset is leased? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).) Print References 11.0 % ROI

Answer 1

Answer : ROI 12.5%.

Explanation :

Total income after considering lease payment = Current earning + Incremental cash flow from investment - yearly lease rents

= $2,340,000 + $840,000 - $740,000 = $2,440,000.

Divisional assets = $19,500,000

ROI = ($2,440,000. / $19,500,000) * 100

= 12.5 %