The Super Company used a ROFE (return on funds employed) method of evaluating investments. The income of each period is divided by the average assets used during the period. This is done for each period and then an average ROFE is computed of all the ROFEs.

The controller of the Super Company defends the procedure since it is consistent with the performance evaluation procedures that are used after the investment is acquired.

The company is currently evaluating two investments (A and B).

The firm requires a 0.20 return for an investment to be acceptable. The firm acquired investment A.

Which investment is more desirable?

Transcribed Image Text:

A B 0 -$20,000 -$20,000 Revenue Depreciation Income Average investment ROFE Average ROFE Year 1 $11,000 10,000 $1,000 15,000 0.067 A 0.24 1 +$11,000 +$12,100 Year 2 $12,100 10,000 $ 2,100 5,000 0.420 Year 1 $12,100 10,000 $ 2,100 15,000 0.140 B 0.17 2 +$12,100 +$11,000 Year 2 $11,000 10,000 $ 1,000 5,000 0.200