Question:
In January 2001 the Status Quo Company was formed. Total assets were $500,000, of which $300,000 consisted of depreciable fixed assets. Status Quo uses straight-line depreciation of $30,000 per year, and in 2001 it estimated its fixed assets to have useful lives of 10 years. After tax income has been $26,000 per year each of the last 10 years. Other assets have not changed since 2001.
a. Compute return on assets at year-end for 2001, 2003, 2006, 2008, and 2010. (Use $26,000 in the numerator for each year.)
b. To what do you attribute the phenomenon shown in part a?
c. Now assume income increased by 10 percent each year. What effect would this have on your above answers? (A comment is all that is necessary.)