One Division of the Marvin Educational Enterprises Has Depreciable Assets

question 90

Multiple Choice

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000. The cash flows from these assets for the past three years have been:
$$\begin{array} { c l l } \text { Year } & { \text { Cash flows } } \\1 & \mathbf { \$ } 1,200,000 \\2 & \$ 1,400,000 \\3 & \$ 1,620,000\end{array}$$
The current (i.e., replacement) costs of these assets were expected to increase 25% each year.
-Marvin used the straight-line depreciation method and the assets had an estimated useful life of 10 years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.
What is the ROI using historical cost and gross book value?
$\begin{array} { l r r r } & \text { Year } 1 & \text { Year } 2 & \text { Year 3 } \\\end{array}$
A) $\begin{array} { l r r r } & 20.0 \% & 25.0 \% & 30.5 \% \\\end{array}$
B) $\begin{array} { l r r r } & 25.0 \% & 28.0 \% & 32.0 \% \\\end{array}$
C) $\begin{array} { l r r r } & 18.0 \% & 26.5 \% & 28.0 \% \\\end{array}$
D) $\begin{array} { l r r r } & 30.0 \% & 35.0 \% & 40.5 \%\end{array}$

• A) \(\begin{array} { l r r r } & 20.0 \% & 25.0 \% & 30.5 \% \\\end{array}\)
• B)\(\begin{array} { l r r r } & 25.0 \% & 28.0 \% & 32.0 \% \\\end{array}\)
• C) \(\begin{array} { l r r r } & 18.0 \% & 26.5 \% & 28.0 \% \\\end{array}\)
• D) \(\begin{array} { l r r r } & 30.0 \% & 35.0 \% & 40.5 \%
• \end{array}\)
• A) Option A
• B) Option B
• C) Option C
• D) Option D

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Definitions:

Costs

Expenses incurred in the process of creating, manufacturing, or providing a service or product, including fixed, variable, and semi-variable costs.

Controllable Margin

Contribution margin less controllable fixed costs.

Controllable Fixed Costs

Fixed costs that management has the ability to influence or change in the short term.

Profit Center

A responsibility center that incurs costs and also generates revenues.