Refer to the information in Problem 15.28. The manager of Midwest Mining is considering a new project.
Question:
Average operating assets ..... $500,000
Net operating income ........ $65,000
Minimum required rate of return ... 10%
REQUIRED
A. Calculate the new ROI if the equipment is (1) purchased or (2) leased.
B. Calculate the new residual income if the equipment is (1) purchased, or (2) leased.
C. One of the adjustments that can be made using EVA is to treat all operating lease costs as if they were purchases—in other words, to capitalize the lease. If Midwest Mining used EVA with this adjustment, how might the manager’s incentives and behavior change? Explain.
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Related Book For
Cost Management Measuring Monitoring and Motivating Performance
ISBN: 978-0470769423
2nd edition
Authors: Leslie G. Eldenburg, Susan K. Wolcott
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