Early in January 2016, Tyler, Inc., acquired a new machine and incurred $12,000

Question

Early in January 2016, Tyler, Inc., acquired a new machine and incurred $12,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $95,000 on average total assets of $774,000 for 2016. 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 Tyler, Inc., for 2016.

b. Calculate the ROI for Tyler, Inc., for 2016, assuming that the $12,000 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.)

Explanation / Answer

a

Calculation of the ROI for Tyler, Inc., for 2016

ROI = Net operating Income / Average Operating Assets

= $95,000 / $774,000 = 12.274 %

b

Calculation of the correct ROI for Tyler, Inc., for 2016

Correct Net operating income :

Net operating income (given) + Interest wrongly charged - Additional Depreciation

= $95,000 + $12,000 - ($12,000 /10) = $105,800

Correct average total assets : Average total assets (given) + Interest to capitalize -  Additional Depreciation

=  $774,000 + $12,000 - $1,200 = $784,800

ROI = $105,800 / $784,800 = 13.481 %

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