Question

15.

One division of the Marvin Educational Enterprises has depreciable assets costing $4,900,000. The cash flows from these assets for the past three years have been:

Year		Cash flows
1		$	1,911,000
2		$	2,156,000
3		$	2,205,000

The current (i.e., replacement) costs of these assets were expected to increase 20% each year. Marvin used the straight-line depreciation method; the estimated useful life is 10-years with nosalvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.

What is the ROI using current costs and gross book value?

	Year 1			Year 2			Year 3
A.	32.5	%		30.6	%		26.0	%
B.	25.6	%		22.7	%		22.2	%
C.	27.0	%		29.6	%		27.7	%
D.	22.5	%		20.6	%		16.0	%

Option A

Option B

Option C

Option D

Answer 1