The Alexandria division of Atkinson Company just purchased an asset for $120,000. The asset has a 3-year life. Atkinson’s top management evaluates Lisa LaVilla, manager of the Alexandria division, based on ROI for this asset. She can choose to measure the asset using either gross asset value or net asset value. Her operating income before depreciation each year is $100,000.
1. What is the Alexandria division’s ROI for each of the 3 years using the gross asset value?
2. What is the Alexandria division’s ROI for each of the 3 years using the net asset value?
3. If LaVilla expects Atkinson to transfer her to a different division in about a year, which asset valuation policy would she prefer?