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Vegan Steaks had the best year ever, with sales of $4,500,000 and operating profit of $950,000....

Vegan Steaks had the best year ever, with sales of $4,500,000 and operating profit of $950,000. The balance sheet at the beginning of the year showed assets used in production with a cost of $20,000,000 and accumulated depreciation of $5,000,000. The company didn’t buy any assets during the year but did have depreciation expense of $1,000,000. Calculate the ROI for the year.

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Expert Solution

Solution:

The formula for calculating the Return on Investment ( ROI ) is

= Operating Profit / Average assets

Where

Average assets = ( Opening balance of assets + Closing balance of assets ) / 2

As per the information given in the question we have

Operating profit = $ 950,000

Cost of assets = $ 20,000,000 ; Accumulated Depreciation at the beginning of the year = $ 5,000,000

Depreciation expense incurred during the year = $ 1,000,000

We know that

Opening balance of assets = Cost of assets – Accumulated Depreciation at the beginning of the year

Applying the available information in the above formula we have

Opening balance of assets = $ 20,000,000 - $ 5,000,000 = $ 15,000,000

We know that

Closing balance of assets = Cost of assets – Accumulated Depreciation at the beginning of the year - Depreciation expense incurred during the year

Applying the available information in the above formula we have

Closing balance of assets = $ 20,000,000 - $ 5,000,000 - $ 1,000,000 = $ 14,000,000

We know that

Average assets = ( Opening balance of assets + Closing balance of assets ) / 2

As per the information available we have

Opening balance of assets = $ 15,000,000 ; Closing balance of assets = $ 14,000,000

Applying the available information in the formula for average assets we have

= ( $ 15,000,000 + $ 14,000,000 ) / 2

= $ 29,000,000 / 2

= $ 14,500,000

Thus the average assets = $ 14,500,000

Calculation of Return on Investment:

The formula for calculating the Return on Investment ( ROI ) is

= Operating Profit / Average assets

As per the information available we have

Operating profit = $ 950,000

Average assets = $ 14,500,000

Applying the available information in the formula we have

= $ 950,000 / $ 14,500,000

= 0.065517

= 6.5517 %

= 6.55 %

Thus the Return on Investment (ROI) for the year = 6.55 %

jeff jeffy answered 5 months ago
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