# Question

Capitalizing versus expensing-effect on ROI. Early in January 2013, Tellco, Inc., acquired a new machine and incurred $300,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $3,000,000 on average total assets of $24,000,000 for 2013. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method.

Required:

a. Calculate the ROI for Tellco, Inc., for 2013.

b. Calculate the ROI for Tellco, Inc., for 2013, assuming that the $300,000 had been capitalized and depreciated over 10 years using the straight-line method. (Hint: There is an effect on net operating income and average assets.)

c. Given your answers to a and b, why would the company want to account for this expenditure as an expense?

d. Assuming that the $300,000 is capitalized, what will be the effect on ROI for 2014 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2013? Explain your answer.

Required:

a. Calculate the ROI for Tellco, Inc., for 2013.

b. Calculate the ROI for Tellco, Inc., for 2013, assuming that the $300,000 had been capitalized and depreciated over 10 years using the straight-line method. (Hint: There is an effect on net operating income and average assets.)

c. Given your answers to a and b, why would the company want to account for this expenditure as an expense?

d. Assuming that the $300,000 is capitalized, what will be the effect on ROI for 2014 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2013? Explain your answer.

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