Mesopotamian Materials Inc. (MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below: UrBabylonFixed assets, gross$2,500$4,000Accumulated depreciation$1,500$1,200Other assets$500$750Liabilities$500$1,000Sales$6,750$7,200Net income after tax*$743$1,008Average age of fixed assets (years)155 *Net income is after tax but before interest MMI's weighted average cost of capital (WACC) is 11.5%. The MMI measures division performance based on the book value of net assets. The producer price index 15 years ago was 100, 116 five years ago, and currently is 125. Which is true, when fixed asset costs are adjusted upward for inflation? Babylon's RONA is 35.8%Babylon's RONA is 26.3%Ur's depreciation expense increases by $19 more than Babylon'sBabylon's price adjustment multiplier is 1.16

Return on net operation assets (RONA) is an efficiency measure ratio that indicates the company's…

Answered: Mesopotamian Materials Inc. (MMI) has…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Mesopotamian Materials Inc. (MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below:

	Ur	Babylon
Fixed assets, gross	$2,500	$4,000
Accumulated depreciation	$1,500	$1,200
Other assets	$500	$750
Liabilities	$500	$1,000
Sales	$6,750	$7,200
Net income after tax*	$743	$1,008
Average age of fixed assets (years)	15	5

*Net income is after tax but before interest

MMI's weighted average cost of capital (WACC) is 11.5%. The MMI measures division performance based on the book value of net assets. The producer price index 15 years ago was 100, 116 five years ago, and currently is 125.

Which is true, when fixed asset costs are adjusted upward for inflation?

Babylon's RONA is 35.8%

Babylon's RONA is 26.3%

Ur's depreciation expense increases by $19 more than Babylon's

Babylon's price adjustment multiplier is 1.16

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