Question

The Singer Division of Patio Enterprises currently earns $2.64 million and has divisional assets of $22.0 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,423,000 and will have a yearly cash flow of $852,000. 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 18 percent. Ignore taxes. The division manager learns that he has the option to lease the asset on a year-to-year lease for $748,000 per year. All depreciation and other tax benefits would accrue to the lessor. 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).) ROI

Answer 1

ROI after leased divisional income 2640000+(852000- 748000) operating assets ROI- DIVISIONAL INCOME/OPERATING ASSETS 2744000 22000000 12.5% ANSWER ROI 12.5 0