The chief operating officer of the Wisconsin Corporation is considering the effect of depreciation on company ROI. In the most recent year net operating profit after taxes was $30,000 and investment (total assets of $360,000 less noninterest-bearing current liabilities of $20,000) was $340,000,000.
a. Assume that total assets will decline each year by 5 percent due to depreciation of plant equipment but NOPAT will remain constant, calculate ROI for each of the next five years.
b. Explain why evaluation in terms of ROI may lead managers to delay purchases of equipment that , in the long run, will be needed to remain competitive.