Question
The Singer Division of Patio Enterprises currently earns $3.92 million and has divisional assets of $24.5 million. The division manager is considering the acquisition of
The Singer Division of Patio Enterprises currently earns $3.92 million and has divisional assets of $24.5 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,471,000 and will have a yearly cash flow of $864,000. 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 companys cost of capital is 16 percent. Ignore taxes.
Required:
a. What is the divisional ROI before acquisition of the new asset? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)
b. What is the divisional ROI in the first year after acquisition of the new asset? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)
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