The Singer Division of Patio Enterprises currently earns $2.45 million and has divisional assets of$19.6...

Question:

The Singer Division of Patio Enterprises currently earns $2.45 million and has divisional assets of$19.6 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,381,000 and will have a yearly cash flow of$841,500. 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 11 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?

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