Chapter 14, Problem 37E

Impact of an Asset Disposal on Performance Measures

Harbor Division has total assets (net of accumulated depreciation) of $660,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $60,000. Expected divisional income in year 1 is $92,400 including $5,400 in income generated by the machine (after depreciation). Harbor’s cost of capital is 12 percent. Harbor is considering disposing of the asset today (the beginning of year 1).

Required

1. a.      Harbor computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Harbor retains the asset?
2. b.      What would divisional ROI be for year 1 assuming Harbor disposes of the asset for its book value (there is no gain or loss on the sale)?
3. c.       Harbor computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Harbor retains the asset?
4. d.      What would divisional residual income be for year 1 assuming Harbor disposes of the asset for its book value (there is no gain or loss on the sale)?