Early in January 2010, Tellco, Inc. acquired a new machine andincurred $100,000 of interest, installation , and overhead coststhat should have been capitalized but were expensed. The companyearned net operating income of $1,000,000 on average total assetsof $8,000,000 for 2010. Assume that the total cost of the newmachine will be depreciated over 10years using the straight-linemethod.
A. Calculate the ROI for Tellco, Inc for 2010
b. Calculate the ROI for Tellco, Inc for 2010 assuming that the$100,000 had been capitalized and depreciated over 10 years usingthe straight-line method.
c. Given your answers to a and b, why would the company want toaccount for the expediture as an expense?
d. Assuming that the $100,000 is capitalized, what will be theeffect on ROI for 2011 and subsequent years, compared to expensingthe interest, installation, and overhead costs in 2010? Explainyour answer.
Early in January 2010, Tellco, Inc. acquired a new machine andincurred $100,000 of interest, installation , and overhead coststhat should have been capitalized but were expensed. The companyearned net operating income of $1,000,000 on average total assetsof $8,000,000 for 2010. Assume that the total cost of the newmachine will be depreciated over 10years using the straight-linemethod.
A. Calculate the ROI for Tellco, Inc for 2010
b. Calculate the ROI for Tellco, Inc for 2010 assuming that the$100,000 had been capitalized and depreciated over 10 years usingthe straight-line method.
c. Given your answers to a and b, why would the company want toaccount for the expediture as an expense?
d. Assuming that the $100,000 is capitalized, what will be theeffect on ROI for 2011 and subsequent years, compared to expensingthe interest, installation, and overhead costs in 2010? Explainyour answer.
