Question - The Singer Division of Patio Enterprises currently earns $3.22 million and has divisional assets of $23.0 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,459,000 and will have a yearly cash flow of $861,000. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 14 percent. Ignore taxes.
Required:
a. What is the divisional ROI before acquisition of the new asset?
b. What is the divisional ROI in the first year after acquisition of the new asset?