Noonan Division has total assets (net of accumulated depreciation) of $2,200,000 at the beginning of year 1.

Question:

Noonan Division has total assets (net of accumulated depreciation) of $2,200,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $200,000. Expected divisional income in year 1 is $330,000 including $28,000 in income generated by the machine (after depreciation). Noonan’s is 12 percent. Noonan is considering disposing of the asset today (the beginning of year 1).
Required
a. Noonan computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset?
b. What would divisional ROI be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)?
c. Noonan computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Noonan retains the asset?
d. What would divisional residual income be for year 1 assuming Noonan 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...