Division A has a building with the same original cost as Division B,except that it was purchased four years before Division B's building.If both divisions have identical operating incomes and use the net book value approach for calculating return on investment (ROI),which of the following will be true?
A)Both divisions will have the same ROI.
B)Division B will have a higher ROI.
C)Division A will have a higher ROI.
D)More information is needed to answer this question.
E)None of the answer choices is correct.

Question

Quizplus · Accepted Answer

Since both divisions have identical operating incomes and use the net book value approach for calculating ROI, the division with a lower original cost (Division A) will have a higher ROI because its net book value will be lower due to being purchased four years earlier. This is because depreciation will have reduced the original cost of Division A's building more than Division B's building over four years.

Division a Has a Building with the Same Original Cost