Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 26

Effect of depreciation on ROI Alpha, Inc., and Beta Co. are sheet metal processors that supply component parts for consumer product manufacturers. Alpha, Inc., has been in business since 1980 and is operating in its original plant facilities. Much of its equipment was acquired in the 1980s. Beta Co. was started two years ago and acquired its building and equipment then. Each firm has about the same sales revenue, and material and labor costs are about the same for each firm. What would you expect Alpha’s ROI to be relative to the ROI of Beta Co.? Explain your answer. What are the implications of this ROI difference for a firm seeking to enter an established industry?

Step 1 of 2

ROI – Effects of depreciation:

ROI: It is a measure to evaluate the effectiveness or performance of an investment in terms of its returns or benefits.

Depreciation: It is a method of assigning the tangible asset’s cost over its estimated useful life.