Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 25

Impact of Leasing on Performance Measures

Refer to the data in Exercise 14-24. The division manager learns that he has the option to lease the asset on a year-to-year lease for $148,000 per year. All depreciation and other tax benefits would accrue to the lessor. What is the divisional ROI if the asset is leased?

Step 1 of 3

Given,

Divisional assets/investment of Division “O” is $3.9 million

After-tax income or profit currently earned by the division “O” is $780,000

Cost of capital is 15% or 0.15

Lease rent of the asset per year is $148,000

Increase in sales/cash inflows with respect to lease of the asset is $168,000