Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
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Textbook Question
Chapter 14, Problem 42E
Effects of Current Cost on Performance Measurements
Upper Division of Lower Company acquired an asset with a cost of $600,000 and a four-year life. The
The cost of the asset is expected to increase at a rate of 10 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes.
Required
- a. What is the
ROI for each year of the asset’s life, using a historical cost approach? - b. What is the ROI for each year of the asset’s life if both the investment base and
depreciation are determined by the current cost of the asset at the start of each year?
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The following details are provided by a manufacturing company:
Investment
Useful life
Estimated annual net cash inflows for first year
Estimated annual net cash inflows for second year
Estimated annual net cash inflows for next ten years
Residual value
Product line
$1,170,000
12 years
$500,000
$360,000
$360,000
$50,000
Depreciation method
Straight-line
14%
Required rate of return
Calculate the payback period for the investment. (Round your answer to two decimal places.)
OA. 2.34 years
OB. 2.77 years
OC. 2.86 years
OD. 2.94 years
Upper Division of Lower Company acquired an asset with a cost of $560,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows.
Year
Cash Flow
1
$
205,000
2
270,000
3
290,000
4
315,000
The cost of the asset is expected to increase at a rate of 10 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes.
Required:
a. What is the ROI for each year of the asset's life, using a historical cost approach? (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)
b. What is the ROI for each year of the asset's life if both the investment base and depreciation are determined by the current cost of the asset at the start of each year? (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)
Upper Division of Lower Company acquired an asset with a cost of $580,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows.
Year
Cash Flow
1
$
210,000
2
250,000
3
285,000
4
320,000
The cost of the asset is expected to increase at a rate of 20 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes.
Required:
a. What is the ROI for each year of the asset's life, using a historical cost approach?
b. What is the ROI for each year of the asset's life if both the investment base and depreciation are determined by the current cost of the asset at the start of each year?
Chapter 14 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 14 - What are the advantages of divisional income as a...Ch. 14 - How is divisional income like income computed for...Ch. 14 - How is return on investment (ROI) computed?Ch. 14 - What are the advantages of using an ROI-type...Ch. 14 - How can ratios, such as ROI, be used for control...Ch. 14 - How does residual income differ from ROI?Ch. 14 - How does EVA differ from residual income?Ch. 14 - What impact does the use of gross book value or...Ch. 14 - What are the dangers of using only business unit...Ch. 14 - A company prepares the master budget by taking...
Ch. 14 - Prob. 11CADQCh. 14 - What problems might there be if the same methods...Ch. 14 - Prob. 13CADQCh. 14 - The chapter identified some problems with ROI-type...Ch. 14 - Failure to invest in projects is not a problem...Ch. 14 - How would you respond to the following comment?...Ch. 14 - Prob. 17CADQCh. 14 - Prob. 18CADQCh. 14 - Prob. 19CADQCh. 14 - Prob. 20CADQCh. 14 - Prob. 21CADQCh. 14 - Compute Divisional Income Arlington Clothing,...Ch. 14 - Compute Divisional Income Refer to Exercise 14-22....Ch. 14 - Computing Divisional Income: Incomplete...Ch. 14 - Compute RI and ROI The Campus Division of...Ch. 14 - Prob. 26ECh. 14 - Compare Alternative Measures of Division...Ch. 14 - Comparing Business Units Using ROI Back Mountain...Ch. 14 - Comparing Business Units Using Residual Income...Ch. 14 - Prob. 30ECh. 14 - Universal Electronics, Inc. (UEI), which started...Ch. 14 - Comparing Business Units Using Residual...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Impact of New Asset on Performance Measures The...Ch. 14 - Refer to the data in Exercise 14–34. The division...Ch. 14 - Refer to the information in Exercises 14–34 and...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Compare Historical Cost, Net Book Value to Gross...Ch. 14 - Prob. 40ECh. 14 - Prob. 41ECh. 14 - Effects of Current Cost on Performance...Ch. 14 - Comparing Business Units Using Divisional Income,...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Prob. 45PCh. 14 - Equipment Replacement and Performance Measures...Ch. 14 - Prob. 47PCh. 14 - Prob. 48PCh. 14 - Prob. 49PCh. 14 - Prob. 50PCh. 14 - Prob. 51PCh. 14 - Evaluate Performance Evaluation System: Behavioral...Ch. 14 - ROI, EVA, and Different Asset Bases Hys is a...Ch. 14 - Economic Value Added Bisbee Health Products...Ch. 14 - Prob. 55PCh. 14 - Prob. 56PCh. 14 - Refer to the information in Exercise 14-39. Assume...Ch. 14 - Refer to the information in Exercise 14-42. Assume...
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