Reference no: EM132953494
Question - The Green Division of Colors Company currently earns P 2,340,000 and has divisional assets of P 19,500,000. The division manager is considering the acquisition of a new asset that will add to profits. The investment has a cost of P 3,375,000 and will have a yearly cash flow of P 840,000. 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 9%. Ignore taxes.
Required -
1. What is the division's ROI before the acquisition of the new asset?
2. What is the divisional ROI in the first year after acquisition of the new asset?
3. What is the division's residual income before considering the project?
4. What is the residual income if the asset is purchased?
5. Assume that the division managers learns that he has the option to lease the asset on a year-to year lease for P 470,000. All depreciation and other tax benefits would accrue to the lessor. What is the divisional ROI if the asset is leased?
6. Assume the same data as in 5 above. What is the division's residual income if the asset is leased?
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