Return on Investment
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What method would be most appropriate for calculating the return on investment? Why? What would be the ROI for the current year?
Fiscal Year, Jan. 1 to Dec. 31 (000 omitted)
Total assets, Jan. 1 $400,000
Total assets, Dec. 31 525,000
Long-term debt, Jan. 1 75,000
Long-term debt Dec.31 96,000
Owner's equity, Jan. 1 278,000
Owner's equity, Dec. 31 303,000
Net income for the year 54,000
Interest expense on long term debt 4,200
Tax rate 30%
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Solution Summary
The solution explains how to calculate the return on investment
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The most appropriate method for calculating the ROI is:
ROI = (Net Income + Interest X(1-tax rate)/Average Total Assets
We use this formula because we are measuring the return on investment and total assets represent the total investment. We take the average since the return is earned over a period of time and so the average gives a better picture as opposed to the year end value.
We add the ...
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