Harbor Division has total assets (net of accumulated depreciation) of $660,000 at the beginning of year 1.

Question:

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
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?
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)?
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?
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)?
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Fundamentals of Cost Accounting

ISBN: 978-1259565403

5th edition

Authors: William Lanen, Shannon Anderson, Michael Maher

Question Posted: