Veach Division has total assets (net of accumulated depreciation) of $462,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $42,000. Now, assume that Veach has been leasing this machine for $7,200 annually. Expected divisional income in year 1 is $55,440 including $2,940 in income generated by the leased machine (after the lease payment). Veach's cost of capital is 10 percent. Veach can cancel the lease on the machine without penalty at any time. Required: a. Veach computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Veach retains the lease on the machine? Note: Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1). b. What would divisional ROI be for year 1 assuming Veach cancels the lease on the machine? Note: Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1). c. Veach computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Veach retains the lease on the machine? d. What would divisional residual income be for year 1 assuming Veach cancels the lease on the machine? a ROI before lease cancellation b. ROI after lease cancellation c. Residual income before lease cancellation Id Residual income after leare cancellation $ 10.9% 12.5 % 9,240 10.500
Veach Division has total assets (net of accumulated depreciation) of $462,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $42,000. Now, assume that Veach has been leasing this machine for $7,200 annually. Expected divisional income in year 1 is $55,440 including $2,940 in income generated by the leased machine (after the lease payment). Veach's cost of capital is 10 percent. Veach can cancel the lease on the machine without penalty at any time. Required: a. Veach computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Veach retains the lease on the machine? Note: Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1). b. What would divisional ROI be for year 1 assuming Veach cancels the lease on the machine? Note: Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1). c. Veach computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Veach retains the lease on the machine? d. What would divisional residual income be for year 1 assuming Veach cancels the lease on the machine? a ROI before lease cancellation b. ROI after lease cancellation c. Residual income before lease cancellation Id Residual income after leare cancellation $ 10.9% 12.5 % 9,240 10.500
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Transcribed Image Text:Veach Division has total assets (net of accumulated depreciation) of $462,000 at the beginning of year 1. One of the assets is a
machine that has a net book value of $42,000. Now, assume that Veach has been leasing this machine for $7,200 annually. Expected
divisional income in year 1 is $55,440 including $2,940 in income generated by the leased machine (after the lease payment). Veach's
cost of capital is 10 percent. Veach can cancel the lease on the machine without penalty at any time.
Required:
a. Veach computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Veach retains the
lease on the machine?
Note: Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).
b. What would divisional ROI be for year 1 assuming Veach cancels the lease on the machine?
Note: Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).
c. Veach computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1
assuming Veach retains the lease on the machine?
d. What would divisional residual income be for year 1 assuming Veach cancels the lease on the machine?
a. ROI before lease cancellation
b. ROI after lease cancellation
c. Residual income before lease cancellation
d. Residual income after lease cancellation
$
$
10.9 %
12.5 %
9,240
10,500
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