Early in January 2013, Tellco, Inc., acquired a new machine and incurred $11,000

Question

Early in January 2013, Tellco, Inc., acquired a new machine and incurred $11,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $115,000 on average total assets of $897,000 for 2013. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method. Required: a. Calculate the ROI for Tellco, Inc., for 2013. Calculate the ROI for Tellco, Inc., for 2013, assuming that the $11,000 had been capitalized and depreciated over 10 years using the straight-line method.

Explanation / Answer

A) ROI is a performance measurement tool used to know the effciency of an investment. It tells us how much money is earned on the sacrifice of the total cost (investement). It is also used to compare the return on two investments.

In general term:
ROI = (Income from Investment - Cost of Invstement)/Cost of Investment.

Also, ROI is calculated by dividing net operating income with average assets.

so here, ROI = $115,000/$897,000 = 12.8%

B) If $11,000 is capitalized instead of expensed out, It will lead the net profit increase by the $11,000 after deducting deprication of $1,100 ($11,000/10). Hence net income will be $(115,000+11,000-1,100=$124,900).

Average Assets would also increase to $901,950.

hence, ROI = $124,900 / $901,950 = .138477 = 13.8%

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.