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Question - A manager in one of the investment centers of the DeSoto Corporation is considering the effect of depreciation on the return on investment in its unit. In the most recent year, the unit had net income of $1,377,000 and the invested average assets were $16,200,000. The manager estimates that total assets will remain mostly stable over the next three years but there will be a decline in assets each year by 6 percent due to depreciation of plant and equipment. Net income will remain constant.
Required -
a) Calculate return on investment for each of the next three years considering the change in value of the assets. Show all calculations.
b) Briefly explain why performance evaluation of the unit and manager in part a) in terms of return on investment (ROI) may lead this manager and others to delay purchases of equipment that, in the long-run, will be needed to remain competitive.
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