The Following Information Was Presented by User-Friendly Industries Company for an Asset

question 64

Multiple Choice

The following information was presented by User-Friendly Industries Company for an asset purchased at the beginning of the previous year.
$$\begin{array} { l c } \text { Original cost of the asset } & \$ 20,000 \\\text { Useful life of the asset } & 10 \text { years } \\\text { Annual operating profit, including depreciation } & \$ 4,000 \\\text { Salvage value } &\$ - 0 -\end{array}$$
What is the return on investment (ROI) assuming User-Friendly uses (a) the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?

• A) 11.1%.
• B) 20.0%.
• C) 22.2%.
• D) 25.0%.

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Definitions:

Required Rate Of Return

The minimum annual percentage return an investor expects to achieve by investing in a particular asset or project.

Net Operating Income

A measure of a company's profitability, calculated as the difference between total revenue and operating expenses, excluding taxes and interest.

Average Operating Assets

The average value of the assets used in the operations of a business over a specific period.

Net Operating Income

The total profit of a company after operating expenses are subtracted from gross profit.