Impact of an Asset Disposal on Performance Measures
Refer to the facts in Exercise 14 27, but assume that Noonan has been leasing the machine for $40,000 annually. Assume also that the machine generates income of $28,000 annually after the lease payment. Noonan can cancel the lease on the machine without penalty at any time.
Required
a. Noonan computes ROI using beginning of the year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset?
b. What would divisional ROI be for year 1 assuming Noonan disposes of the asset?
c. Noonan computes residual income using beginning of the year net assets. What will the divisional residual income be for year 1 assuming Noonan retains the asset?
d. What would divisional residual income be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)?
Exercise 14 27: Impact of an Asset Disposal on Performance Measures
Noonan Division has total assets (net of accumulated depreciation) of $2,200,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $200,000. Expected divisional income in year 1 is $330,000 including $28,000 in income generated by the machine (after depreciation). Noonan’s cost of capital is 12 percent. Noonan is considering disposing of the asset today (the beginning of year 1).
Required
a. Noonan computes ROI using beginning of the year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset?
b. What would divisional ROI be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)?
c. Noonan computes residual income using beginning of the year net assets. What will the divisional residual income be for year 1 assuming Noonan retains the asset?
d. What would divisional residual income be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)?