Problem: Early in January 2010, Tellco, Inc. acquired a new machine and incurred $100,000 of interest, installation , and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $1,000,000 on average total assets of $8,000,000 for 2010. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method.
1) Calculate the ROI for Tellco, Inc for 2010
2) Calculate the ROI for Tellco, Inc for 2010 assuming that the $100,000 had been capitalized and depreciated over 10 years using the straight-line method.
3) Given your answers to a and b, why would the company want to account for the expenditure as an expense?
4) Assuming that the $100,000 is capitalized, what will be the effect on ROI for 2011 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2010? Explain your answer.