Early in January 2013, Tellco, Inc., acquired a new machine and incurred $9,000

ID: 2490167 • Letter: E

Question

Early in January 2013, Tellco, Inc., acquired a new machine and incurred $9,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $110,000 on average total assets of $885,000 for 2013. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method.

A.Calculate the ROI for Tellco, Inc., for 2013 =

Calculate the ROI for Tellco, Inc., for 2013, assuming that the $9,000 had been capitalized and depreciated over 10 years using the straight-line method. (Hint: There is an effect on net operating income and average assets.)

ROI=

Explanation / Answer

ROI = net operating income / average asset

= 110,000/ 885,000

= 12.43%

(b) depreciation 9000/10 = 900 per years

So net income will increase by 110,000 + ( 9000 – 900 depreciation for year) = 118,100

Increase in average assets =9100/2 = 4,050

ROI = 118,100/889,050

= 13.28%